Jeremy Siegel's WSJ Piece Highlights the Fundamental Challenge of Studying Macro-Finance Issues

Jeremy Siegel has already convinced me to hold stocks for the long run.   Now, he is getting more ambitious as he seeks to study current events. Today, you can read here    his points concerning QE2 and why the recent rise in long term interests rates is a good thing!  Now, I could believe this would be good for him if he is holding a large gold position but he makes a different point.


"Long-term Treasury rates are influenced positively by economic growth—which encourages consumers to borrow in anticipation of higher incomes and causes firms to seek funds to expand capacity—and by inflationary expectations. Long-term Treasury rates are affected negatively by risk aversion: Seeking a safe haven, investors pile into Treasury bonds, running up their prices and lowering their yields."

So, there are 3 factors that could raise long term interest rates;

1. anticipated economic growth
2. anticipated inflation
3. reduced panic and reduced flight to the "risk free asset"

Like Meatloaf,  Jeremy Siegel believes that "2 out of 3 ain't bad".   He appears to celebrate #1 and #3 as the data generating process here.  Now, he is right to point out that #2 may not be the sole cause of this recent interest spike but his point that 3 different unobservables may account for the facts should trouble Macro-Finance scholars. There is a fundamental identification problem here.   In english, detectives try to find the man who committed the crime.  There is one crime and one bad guy. The model is identified. In the Siegel case, there are 3 competing theories for the limited number of facts but one's view of Bernanke's actions hinge on which theory you believe in. Since we can't use facts to disentangle what is the true data generating process, we can simply quote Mick Jagger in Street Fighting Man; "What is a poor boy to do, except to play in a rock and roll band?"