Monday, August 1, 2016

The Puzzle of Low Rates and Low Inflation

Why, with the world awash in sovereign debt, do we have near zero rates most places and negative rates here and there?   Presumably, the answer must depend upon supply and demand.  But supply is absurdly high and rising. 

If supply is high and rising, then price should fall.  Falling debt prices mean higher interest rates not lower interest rates.  So, what, exactly, is going on?

The only answer that remains is that demand is so high for sovereign debt that rates cannot get off the ground.  There really is no other available answer to this conundrum.

So, why is demand for sovereign debt so high? A lot of the demand is completely artificial, based on government required collateral requirements.  But much of it, especially at the margin, is the government itself, through the actions of central banks.

Both the ECB and the Federal Reserve have purchased an absurd amount of sovereign debt in recent years.  At the margin, this boosts the prices of treasuries and sovereign debt and lowers the yields on sovereign debt.

Another important set of buyers of sovereign debt are frightened investors and businesses who see an increasingly threatening political landscape that views profit-making activities as immoral and potentially illegal. 

If you listen carefully to the Bernie Sanders speeches, you would never, ever invest your money in anything that produces a product in the US. Sanders' supporters say that they would take any profits you might make and distribute it to their friends and allies.  Hillary Clinton has signed onto this plan of confiscating business profits.  So why not park your assets in US treasuries, rather than risk money that cannot possibly produce profits that you can keep?

Having wealth and income in the US and Europe makes you a target of politicians and engenders hatred among the electorate, unless you inherited or used political influence, not business acumen, to gain your income and wealth.  It's okay to amass $150 million as the Clintons have done, without working or risking anything.  But it's not okay to amass the same amount of money by working in the financial services industry, putting in long hours and sacrificing family life to amass the money.  Better to gain your wealth by fleecing the public than by working.

Thus the demand for sovereign debt is essentially unlimited as the interest in actually investing in productive economic concerns has become a boomerang that an intelligent person wishes to avoid.

The problem of declining economic activity is showing up in GDP growth in both the US and the Europe.  Only very large businesses with massive political influence can survive in this environment.  This new "corporate state" will have little or no economic growth and increasing regulations and control of the lives of ordinary citizens.  How soon this becomes the old Soviet Union or today's Venezuela is anybody's guess.  But, that is the end game.

1 comment:

Albert Row said...

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