A second, is a change in how recessions were managed. Keynesian-style fiscal policy made way for a preference for central bank monetary policy stimulus. Unfortunately, monetary policy stimulus is now reaching its limits across the globe and fiscal policy is coming back in vogue (in Europe, the European Central Bank is now even an explicit proponent).
Alternative schools of economic thought that prefer to combine fiscal and monetary policy – like Modern Monetary Theory (MMT)—are also gaining traction.
What’s Next For Treasury Yields—Range-Bound Fluctuations?
If yields will struggle to fall much further—can they rise instead? The answer is probably not. Asset prices and the economy most likely could not sustain higher yields.
So where will they go next? If we’re looking for lessons from history, a good place to start might be the late 1930s—the last time a secular Treasury bull run came to an end.
There are a number of other parallels between that period and today’s. It was the end of the first economic era—known as the classical liberal (or laissez faire) era. Today’s era somewhat takes after it and is therefore known as the ‘neo-classical’ or ‘neo-liberal’ era.
The first era also ended in the years after the Great Depression—an event reminiscent in many ways of the 2008 global financial crisis. It was also the last time populist politics drew quite so much support (as Figure 2 shows).
Figure 2: The Rise Of Populist Politics Indicates Things Are Changing
The key lesson is that Treasury yields remained range-bound for an entire 20-year spell after this period (Figure 3). Today, we feel that something similar can’t be ruled out.