David Frum


The Economic Forecast is... Not Great

Brad DeLong foresees economic underperformance for long years ahead.

Since 1975, the nominal annual premium on the 30-year Treasury bill has averaged 2.2%: in other words, over its lifespan, the 30-year nominal T-bill yields are 2.2 percentage points more than the expected average of future short-term nominal T-bill rates. The current 30-year T-bill yields 3.2% annually, which means that, unless the marginal bond buyer today is unusually averse to holding 30-year Treasuries, she anticipates that short-term nominal T-bill rates will average 1% per year over the next generation.

The US Federal Reserve keeps the short-term nominal T-bill rate near 1% only when the economy is depressed, capacity is slack, labor is idle, and the principal risk is deflation rather than upward pressure on prices. Since WWII, the US unemployment rate has averaged 8% when the short-term nominal T-bill rate is 2% or lower.

That is the future that the bond market sees for America: a slack and depressed economy, if not for the next generation, at least for most of it.