Thursday, June 9, 2011

what happens to corporates ?? chapter 23 of the tales of the rate fetish macronauts

when theres a flight to treasuries the initial effect is to raise corporate rates and lower treasury rates
if the fed steps in and reduces the treasury rates  even lower
does it have enough above zero rate room to lower the corporate default risk premium enough to counter
both
the default risk premium increase

and

the knock on effect to the inflation premium
 from the fed's monetary base increasing  safe rate reducing  reaction

just fooling around here of course

but the entire array of security rates  on n private and m public issues plus f  forex rates and  e equity p/e ratios
makes for quite a bundle to aggregate into one hicksian rate eh ??


in fact there's prolly no rate of real return  feasible in our system
even if we went to negative nominal rates that could induce corporaions the build new capacity or hire additional staff

lets call this formal I(r) the hicks effect
ie that so llong as we can push the real rate r low enough
we can induce all  the I we need

that's like the venerable old escape hatch
called the pigou effect
if product prices fall  low enough
 the purchasing power of money  ie the real balances  will rise high enough to  induce
as much more consumption as we need
a particularly absurd  sub set of the wealth effect