Good exposition from Mike Whitney:
On Tuesday, the 10-year German bund slipped into the bizarro-world of negative rates where lenders actually pay the government to borrow their money. Aside from turning capitalism on its head, negative rates illustrate the muddled thinking of central bankers who continue to believe they can spur growth by reducing the cost of cash. Regrettably, the evidence suggests otherwise. At present, there is more than $10 trillion of government sovereign debt with negative rates, but no sign of a credit expansion anywhere. Also, global GDP has slowed to a crawl indicating that negative rates are not having any meaningful impact on growth. So if negative rates are really as great as central bankers seem to think, it certainly doesn’t show up in the data.
There are a number of factors effecting bond yields: Fear, that a Brexit could lead to more market turbulence and perhaps another financial crisis. Pessimism, that the outlook for growth will stay dim for the foreseeable future keeping the demand for credit weak.. And lack of confidence, that policymakers will be able to reach their target inflation rate of 2 percent as long as wages and personal consumption remain flat. All of these have fueled the flight to safety that has put pressure on yields. But the primary cause of the droopy yields is central bank meddling, particularly QE, which has dramatically distorted prices by reducing the supply of USTs by more than $2.5 trillion in the US alone.So far, so good. Then we get to this.
So what can be done? Is there a way to turn this train around and put the economy back on the road to recovery?
Sure. While the political issues are pretty thorny, the economic ones are fairly straightforward. What’s needed is more bigger deficits, more fiscal stimulus and more government spending. That’s the ticket.
[Ahem] Pardon, Lord Keynes. Your slip is showing.
Keynesians have been telling us that public deficits to stimulate consumption when consumers decide to pay down debt or save for their futures is the cure to what ails us since the 1930′s. The result has been a continuous cycle of booms and busts that is nearing its denouement.
The U.S. is getting older and less white. The economy is, perforce, going to contract. This would not be a problem but for the fact that we are leveraged so far into the future that any contraction spells disaster for large segments of the population (voters, which is why the problem never gets solved). The biggest Bubble right now is the one in public debt. That is what is starving the real economy of capital and why Mike looks in vain for signs of growth. I do think he is half-right, in that roads, bridges, nationwide wi-fi, etc., would probably generate positive ROI versus kerosene and diesel for military logistics.
The Japanese are further down this road than we are. They have no growth despite public debt measured in the quadrillions. By the Keynesians’ hysterical reasoning, public debt should be pushed into the quintillions lest the Japanese starve and their corpses pile up in the streets. The Japanese have not yet exhausted the asset side of their ledger, in the form of high human capital and savings.
There is more debt than can ever be repaid and this economic deadweight is increasingly patent. Can it just be rolled over into infinity? I think if it could, a lot of former governments would still be around. So history has not stopped and eventually this debt, like the mortgage-backed-securities in 2008, will be discounted to the ability of the debtors to repay. Again, like 2008, the Fed will blow up its balance sheet and paper over the drop in nominal values. I don’t think there will be enough left in the tank of the real economy at that point, evidenced by the fact that the economy has barely grown since 2008. Entire sectors will have to disappear for capital to be reallocated to productive uses. Many of us won’t make the cut and will sink into poverty. I wish I were younger.