Tuesday, February 2, 2010

I was saying something quite similar --twenty years ago!

Treasury rates have to go up - Fundmastery Blog - MarketWatch:

"My first reaction was to think, ‘Treasury rates have to go up.’  As we can see from this chart, Non-Defense Spending was under 10% of GDP for years and then it went up into a range of 15% of GDP.  Now, we have seen another ramp up to 19%.  Defense spending was on a long-term downtrend until 2001 when spending on defense turned up again.

We have been in a benign environment for decades with interests heading lower along with a protracted decline in defense spending.  Now, at least, interest rates are very likely to enter an up trend."


(chart source: Cato Institute)

Twenty years ago, as an undergraduate political science major (among other things), I did a senior research paper refuting the argument (I think it was by Lawrence Korb) that defense spending was inherently inflationary. I distinctly recall doing some serious number-crunching using *gasp* SPSS, doing adjustments for time-lag, and looking across several different cases --countries, in other words. What I found should not be that surprising. First, only "newly-industrialized" countries had problems with high defense-as-percentage-of-[then-GNP-but-now]-GDP being associated with high inflation (those countries, twenty years ago, included South Korea and Israel). Second, defense spending was actually somewhat deflationary when balanced against a far more pernicious influence: health spending!

Somewhere, Dr. Bernstein is smiling. He recommended my paper for an undergraduate award. I heard via the grapevine that my findings ticked off another senior member of faculty and so my nomination was 86'd. Sweet vindication...

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