Posted on 09/03/2016 8:21:58 AM PDT by expat_panama
Since the financial crisis, we have become used to living in a world of low interest rates. The official Bank of England interest rate was cut to 0.5pc over seven years ago and now it has been reduced further to 0.25pc.
Until recently, it was possible for long-term investors to earn better returns and protect themselves against inflation by investing in government bonds. That is no longer the case.
In 2010, a 20-year UK government bond was still offering an annual yield of 4pc, significantly above the 2pc inflation target. Yields dropped to between 2.5pc and 3pc following the euro crisis, but even at these rates they could be expected to generate a small positive return in real terms...
...What is the way out of this impasse? First, we must stop digging and making the financial hole any bigger...
...Second, we need a co-ordinated international approach to restoring a more normal level of interest rates and gradually reversing the large bond holdings of central banks built up by QE...
...there was little sign that this is on the agenda at the moment. They are still preoccupied with short-term fire-fighting.
We need a much longer-term strategy from governments and the central banking community to rebalance economic policies – with more emphasis on supply-side reforms and business-friendly fiscal policies to support growth.
Record low government bond yields are signalling an important message: the negative consequences of a prolonged period of very low interest rates are starting to outweigh the benefit provided in terms of economic stimulus.
It is time for a total rethink on the direction of monetary policy, not just in the UK but worldwide. There will be serious long-term consequences for our economy if this does not happen soon.
(Excerpt) Read more at telegraph.co.uk ...
What's even more amazing is how he either knows nothing about economics or is perfectly willing to make up an alternate econ universe that so many readers like to live in. In his fantasy land the world's interest rates are being controlled by QE, and back on the planet Earth we know that QE ended years ago. We also know that out of the total $60T U.S. debt market that the Federal Reserve holds $4T. This means that whatever control the Feds have over interest, the private free markets control fifteen times as much control.
Well, I would say that $4 Trillion is not quite correct. The banking system is required to hold 12% of their deposits, up from around 6% or less. And in Europe that has to be from their own sovereign bonds. When the banks get all the bonds they need, then the bonds will crash or the central banks will need to buy more. Or they may just raise the number to 13%.
I think the main danger of low interest rates is that they don’t stay low. It’s a great opportunity to get your debt paid off, but if you take the opportunity to not pay down debt, you’re going to be hurting when interest rates rise.
This is what our politicians have done to us.
I suspect governments are buying lots of long-term, low-interest rate debt.
I can’t believe natural people in any significant numbers would be buying such financial trash.
John Lennon bought a house in Weybridge, Surrey in 1964 for about 21,000 pounds. It last sold for about 8 million pounds I believe.
“you’re going to be hurting when interest rates rise”
You can actual get 30-year self-amortizing mortgages in the USA. In the USA, there is no interest rate risk. Of course if rates go up to inflation-beating levels, then US housing prices might drop 20% to 40% in many places.
In Britain, however, I think mortgage debt interest rates can commonly be reset about every five years, but I’m not sure about that though.
The fact is that if interest rates stay low, I will have to cut my living costs even more.
I can pass on my expertise in low-cost living. Trust me, that could do a number on the GDP.
...$4 Trillion is not quite correct...
Here's the source and there what we're working with:
Please let me know if your numbers came from sources that can help in understanding what affect the U.S. government (or any other gov't for that matter) has on market economies.
Most people do not buy treasury bonds. Insurance companies, pension funds and banks do. But insurance companies and pension funds buy fewer bonds, preferring to own land or other assets that provide larger income. Banks, however have lost their ability to find other sources of income for most of their reserves. They have to keep cash or buy bonds. Or have the central bank handle their reserves for them. In Europe and Japan they pay for this service. A trillion dollars is a pretty big pile of paper so hoarding cash instead of bonds or the central bank computers is not really an option. That’s why they go negative. Banks in Japan and Europe have two choices, they help the government pay down the debt. Or they loan out the money. The government likes both options.
I don’t doubt that the Federal Reserve holds $4 trillion in treasuries. I am just saying that the Federal Reserve can also force the banks to raise their deposit reserves (which they did by 100%). And by doing so, and requiring it to be triple A or US treasuries. They are forcing the purchase of government debt, far in excess of $4 trillion.
Money is something that has to be quantified, and if it's important enough for us to measure in hard numbers the extent that the Fed's dug into parts of the free market, then it also must be necessary to check out just how far the free market rules the Fed.
What we're seeing altogether is that the Fed can say, try and lower long term interest rates by buying up long term Treasuries, but if bond market traders are able to keep dumping 'em on the market faster than the Fed can buy them then rates are stuck. Like, the Fed supposedly wants interest rates to go up and their last big move up w/ the Fed funds rate was at the end of '15. What's happened since then is that mortgage rates and corp. bond rates have been falling steadily down.
“We also know that out of the total $60T U.S. debt market that the Federal Reserve holds $4T. This means that whatever control the Feds have over interest, the private free markets control fifteen times as much control”
It’s always been the case that the private sector bondholders, aka ‘the bond vigilantes’, have more control over long term interest rates than the Fed when they choose to use it. I recall them demonstrating this back during the Carter administration.
I suspect that one of the larger influences right now is China investing their dollar holdings in Treasury bills. This has the same effect as QE did on dampening US interest rates although I don’t think that they are doing it for that purpose.
Then why don't I get any interest on my bank deposits anymore ?
You're too clever by half Expat.
Really? I pretty much call it
It's a matter of scale, that over 300 million people loaning and borrowing $60T has got to mean more than their hired government workers who are loaning out $4T. That said, I really can't understand why you'd say that some ten year old kid selling a savings bond is what you'd call a "bond vigilante".
one of the larger influences right now is China investing their dollar holdings in Treasury bills
It depends what it's 'larger' than. China holds about a 1/16th of the total federal debt, as compared to say, the 2/3 owned by Americans.
“That said, I really can’t understand why you’d say that some ten year old kid selling a savings bond is what you’d call a “bond vigilante”. “
Well I never made anything like the statement that a 10 old with a Savings Bond is a bond vigilante, that bit of idiocy is yours alone and not based upon anything that I said.
What I did say is that the Bond Vigilantes were active during the Carter Administration. They were reported in the business news all the time. And far from being 10 yr old children they were bond traders with more firepower than the Fed and they would demonstrate this on a weekly basis when the money supply numbers were released.
Sure you did, you said "the private sector bondholders, aka ‘the bond vigilantes’, have more control over long term interest rates than the Fed" and my 10-year old kid w/ a savings bond is in fact a "private sector bond holder".
NP, if your feelings are hurt then I apologize and we can change definitions --and I do thank you for the heads up on this new (to me at least) conspiracy theory. When I read the idea of how a 'bond vigilante' is supposed to be (from wikipedia) "a bond market investor who protests monetary or fiscal policies he considers inflationary by selling bonds, thus increasing yields" I laughed out loud. Then I found this video from money week and laughed even more.
Somehow I can't even consider the existence of bond vigilantes w/o reaching for the tinfoil....
I was just annoyed that you seemed to be stretching what I assumed was a well known term to a ridiculous extent. While you may not remember them they were a very real force. They particularly caught the attention of the Clinton administration as reflected in something Carville said:
“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
The phrase bond vigilante sometimes gets credited to Ed Yardeni back in 1983 but I thought I heard it as early as the 1970s, maybe from the late, great Ed Hart. Hard to put a definite time on it. What was meant by it was very large bond traders who would punish bond prices when they were angered by insufficiently tight monetary policy during that inflationary era. They could and did move the market visibly and were a big reason that Carter installed Paul Volcker to run the Fed. You can find one account of that here:
Somehow it seems hard to believe we're talking about the same thing. Are we saying that there's a gang of bond holders that watches monetary policy and when they the decide that interest rates are too low they sell their holdings at a loss and that changes the interest rates and in turn controls inflation?
If you could clarify maybe. You said it was visible so please show what you're looking at so I could see it too.
This first came to my attention in the late ‘70s when the Fed was releasing weekly money supply reports. When the numbers revealed an increase in the money supply the reaction was immediate, bonds would sell off big enough to drive up interest rates- bond traders were demanding an ever greater inflation premium and punishing the Fed for not restricting the expansion of credit in the banking system.
Market watchers were commenting on how the traders had more firepower than the Fed and were using it to discipline the Fed. If the Fed wasn’t going to fight inflation the traders would sell off bonds as well as demand higher rates at the next Treasury auction.
I learned about this simply from listening to business reports on the radio at the time. Reporters would wait for the release of M1 or M2 or whichever number the traders were watching like hawks and then report the reaction in the bond market. I don’t know of a source that charts this behavior but then I’ve never looked for one before.
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