Tuesday, December 28, 2010

The Inflation is Coming! The Inflation is Coming!

There has been a lot of talk of late of interest rates going up to their highest levels since (gasp!) June and how this portends the hyperinflation Glenn Beck has been warning about ever since he realized he could make money off it.  Well, as with most right wing talking points, this one is pretty easily debunked with a little (double gasp!) thought.

Let's take a look at how these run away interests rates have performed (in this case, on the 10 year treasury bond) versus the S&P 500:

Here, you can see the interest rate appreciation (green line) has occurred almost simultaneously with a huge rally in the S&P.  Also worth noting is that we're still well below where we were this spring.  There are two conclusions to be drawn here, which are really as unspectacular as can be.  First, as bond prices and interest rates are inversely related, this is an example of money coming out of the bond market and moving into the equities market.  Money chases performance.  Second, what is evident is there is hope out there, somewhere, that the US economy (and, by proxy the world economy) is improving.  Irrational Exuberance?  Maybe.  But hyperinflation?  Not so much.

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