[vishakad]

You've got some sound logic there, particularly on why the US is a popular place for investment. That is definitely a factor as to why T-bond yields have stayed low over the last few years. But, is inflation really that big a factor in determining bond yields during auctions?

With regards the '70s, you emphasized "normally" in your reply. Why was that? Weren't the '70s a time of unusually high inflation and unemployment in the US?

And thank you for the book recommendation! It looks really nifty!

[hga]

It's my understanding that perception of future inflation is very important in determining bond yields. At the extreme, you want to get paid back in real terms, not "NuDollars" (hmmm, Heinlein assumed inflation of at least 3 orders of magnitude in the time Citizen of the Galaxy was set). Or why we talk about "real" interest rates, subtracting inflation. Of course, let's not get into how the government is scoring inflation nowadays, or how everyone admits that the cost of education and medicine don't track official inflation at all....

As I understand it, the '70s were "normal" in that that sort of response is what you really should expect from such policies. Check out the book, which I bought but have only glanced at.

The smashing of the Phillips Curve, the official, written into law as I recall, relationship between inflation and unemployment, wasn't considered normal at the time, e.g. the word "stagflation" was coined to describe it. But skimming the Wikipedia article on it suggests that it was never true, or at least not for more than the short term.

And the "'70s" economic agony was rather long term. E.g. you won't read it in Wikipedia, but LBJ closed the gold window to all but central banks in 1968, i.e. moving it much more to the political arena by cutting out "speculators" like George Soros. That was a near catastrophe of the "black swan" type ... at least to them, who thought we could afford both "guns and butter".

With a slow end in the early '80s, delayed in part by the phasing-in of Reagan's tax rate cuts required by the Democratic House, conveniently providing an "It's Morning in America" 1984 campaign theme as "Reaganomics" vanished from the vocabulary ^_^.

[vishakad]

Your inflationary expectations point makes sense. Considering the US economy is in a period of low to zero inflation at this point, it is fair for bond yields to be low for 3-year terms and so. I completely forgot about NuDollars, hehe.

The bit I know about the '70s is also the US going off the gold standard, with Nixon putting the then Fed Governor, Burns, under immense pressure to keep interest rates low in the face of high inflation. Not to mention going off the gold standard altogether.

Much of my reading on economic growth has been rather lopsided on the side of monetary economics. I'm looking to pick up more on the influence of government policy such as tax cuts, etc.

[hga]

Just a few mostly "I Was There" notes, you're headed in the right directions:

"Energy" was a prime issue in the '70s: the '68-71 ending of the gold window (BTW, prior to that it was illegal for US citizens to own gold) plus the Yom-Kipper War resulted mess up crude oil prices and supplies, and Nixon oversaw a fundamental change in regulatory policy that made everything in this and many other areas a lot more expensive (I highly recommend this book ttp://www.amazon.com/gp/product/0307453693/ which is where I learned about LBJ's closing of the gold window, and which actually doesn't feature much of Reagan until I presume the end, I'm still in the Nixon period).

And rather critically Nixon's wage and price controls were never lifted for oil and gas, and by the Carter Administration bureaucrats were determining where every gallon of refined oil went. My father actually set up a tank farm of 55 gallon drums, but that turned out to be needless because among other things the bureaucrats made damned sure farming regions were not lacking.

The "Energy Crisis" ended practically overnight when Reagan deregulated oil (gas might have come later). This was mightily helped by the Soviet invasion of Afghanistan, the Saudis at least signed on to the campaign to bankrupt the Soviet Union by keeping oil prices down.

By the end of the "'70s" inflation was as I recall flirting with 15% per year, and Volker's necessary high interest rate solution brought the prime rate above 20%, and the government had to borrow at ~20% when Reagan came into office, which explains some of what was going on then.

On the other hand, Reagan, the Senate Republicans, and Tip O'Neal, sort of a transitional figure between the older more responsible liberals and the current type, pretty much never seriously cut budgets, instead all the screaming was about decreases from an automatically increasing baseline. Some of those were of course cuts after inflation, but not by much, as usual, "domestic spending" was the price the Democrats/Left demanded for the Right (which at least here used to include a lot of Democrats) to be able to fight the Cold War.

Which of course Reagan won, not that very many people at all believed he would, or could fix our economy. The mood really was grim back then (there was also all that Malthusian "Limits to Grow" (apparently rified by the energy situation), Soylent Green, we're killing the environment and bringing on a new Ice Age, nonsense back then), the first iteration of today's "preppers" were the survivalists back then, I was one (starting from 2nd grade in 1968 when my mother became a Civil Defense Block Mother, back before it was decided "Crisis Relocation" was cheaper on paper and CD -> FEMA).

The government influence of tax rate cuts was profound. I went to college far away from my family in 1979, and at a distance watched my parents substantially shift their economic activity. One extreme of the "'70s" was their taking out a $50K note to computerize a bunch of doctor's offices, and only being able to keep it current, not paying it down, while interest rates were so high.

And everything was done with taxation as a primary issue. As/after the Reagan tax rate cuts were phased in, that became a much smaller issue, and their ventures became much more economically productive.

That today we have one of the highest corporate tax rates in the world is significant.

Anyway, have fun, and after this thread winds down feel free to email me (it's in my Hacker News contact info) if you have any more questions, desire for book recommendations, etc.

[vishakad]

Wow. The '70s were a tumultuous time indeed! I guess Volcker's policies had to really fight for the headlines with that much going on at the time.

I do have many more questions with the issues you brought up, yes :) It was a fun discussion. Thank you! I'll contact you by email.