an upside surprise?

we have a rather unique confluence of economic determinants, which include slow but rising manufacturing profits (in large part due to a restructuring to lower debt), a weak dollar and ultra-low interest rates. low interest rates are not furthering corporate borrowings but can leak out into the usual leveraging channels for interest sensitive investments. it is widely expected that when the fed ends its purchase program of mortgage back securities that long-term interest rates will rise. but there just might be a compensating market for the leveraged products from the massive yield hunting market. none of it will get very far without some significant employment gains and continue debt deleveraging of household debt.

Brenner on the 2002 recovery through asset targeted Keynsian policies:

What actually created the foundation for the new cyclical upturn turned out to be an historic decline in the cost of long term borrowing. From 1995, the yield on ten year Treasury bonds fell more or less steadily and, to the surprise of many, it continued to do so through most of the ensuing expansion, until 2005—declining in this interval from 7.09 per cent to 4.29 per cent in nominal terms and 4.49 per cent to 0.89 per cent in real terms (adjusted by the consumer price index). How is this extraordinary, indeed epoch making, drop-off to be explained?


The economy was rescued, in effect, by its own debility. Between 1973 and the
later 1990s, part and parcel of the long term system wide deceleration, the rate of
investment on a global scale (investment/GDP) steadily declined. With their capital
accumulation slowing, businesses’ call for credit slowed correspondingly, reducing the pressure on long term interest rates. The world crises of 1997-1998 and 2000-2002
sharply accentuated this trend by bringing about a further slackening in the growth of plant, equipment, and software and of employment on a global scale, which further
undermined the demand for loans, and the ensuing business cycle of the years 2001-2007 witnessed the slowest increase of investment, and of growth more generally, within the advanced economies, including the East Asian NICs and Little Tigers, since 1945.

During the same interval, as the US federal budget once again skyrocketed and the
current account deficit set new records year after year, East Asian governments made
ever-greater purchases of dollar-denominated assets for the purpose of holding down the exchange rate of their currencies and reducing the cost of borrowing in the US so as to sustain competitiveness and subsidize demand for their exports. As a consequence, the supply of credit continued to ascend, further easing the cost of borrow0ing. Federal Reserve Board chairmen Alan Greenspan and Ben Bernanke deemed the unexpected failure of long term interest rates to increase a “conundrum” and evolved the convenient theory of a “world savings glut”, originating mainly in East Asia, to explain it. They thereby rationalized record US borrowing and consumption in terms of a distinctive, if not implicitly irrational, East Asian failure to consume—which US policymakers just happened to desperately require to keep American interest rates down and enable the reflation of the enfeebled American economy on track. “The East Asians made us do it.”
Nevertheless, the supposed conundrum and its resolution are both redundant. There was
no global trend toward increasing saving, only a decreased tendency to invest almost
everywhere in the world outside of China.16 It was, in effect, the worsening of the
secular economic slowdown in the advanced capitalist countries plus the drive by East
Asian states to sustain the region’s investment-driven, export-dependent form of
economic development that made for the continuous reduction of the real long term
borrowing right through 2005-2006 that proved the saving grace for the US and global
recovery.