Keyboard worrier

Monday, April 13, 2015

How does Government Debt go negative?

Today came the news that short-term German government paper was following the Swiss example and turning negative, not only that but its expected that it won't be very long until the 10-year Bund follows suit.

Quizzical isn't it? Why would anyone pay for the privilege of lending someone money?

Friends and colleagues of mine, having a hunch that I know a little more about finance than they do have been asking me about this quite a bit recently and to be honest I have struggled to give them an answer they could happily digest. Well it certainly is a "new normal" and set to spread throughout the developed world as things get worse but how and why is it happening?

In short this is what Quantitative Easing has wrought. Institutions paying for the privilege of lending their money to insolvent governments. Not because those borrowers are such low risk counterparties, but rather because now real investors must compete with totally price-insensitive Central Banks hoovering up sovereign debt with freshly 'Printed' money.

If you want to understand this mechanism in a little more detail here is an excellent blog post by David Stockman who is examining a fascinating new blog by none other than the architect of this mess, Ben Shalom Bernanke.

This is the crux of his conceit:
A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.” Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.” The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere.
He doesn't even know what this mythical rate should be, but whatever figure he comes up with I'm sure it will be agreeable to the bankrupt sovereign states of the West.


READER: PLEASE CLICK THE REACTION BELOW - THANKS!

All original material is copyright of its author. Fair use permitted. Contact via comment. Unless indicated otherwise, all internet links accessed at time of writing. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

No comments: