Monday, September 12, 2011

Hussman Makes a Great Point

"[T]he literature on 'real options' is clear that significant economic uncertainty is much like the implied volatility of an option - high uncertainty increases the benefit of waiting to 'exercise' the option. Material restructuring of mortgage debt and sovereign debt, as painful as it might be in the short run, is really the only way to remove the drag of deleveraging and the weight of credit uncertainty that have anchored the economy in unemployment."
"[F]rom a liability-management perspective, the Treasury really ought to be issuing long-dated Treasury debt to the public here with both hands, particularly if yields decline further on credit concerns. [...] On any substantial decline in yield, the best way to preserve the solvency of the U.S., particularly if we have inflation in our long-term future, is to lock in low interest costs for very long maturities."

Something I've been saying for over a year. The Treasury could be doing much more to take advantage of low interest rates.


Eric said...

Maybe they know rates will be going even lower.

Walter said...

Well then in that case, so much for Operation Twist. The treasury and Fed might as well buy and sell from each other.