Mo’ money, mo’ problems: too much capital

Too many with too much spare: 10 year government bond yields as of 31 Jan 2015.  Source: Pension Partners via Twitter.

Too many with too much spare: 10 year government bond yields as of 31 Jan 2015. Source: Pension Partners via Twitter.

I’m confused, and a bit frustrated.  In bullet points:

  • We’re barely recovering from recession, right? I mean, the press are going nuts over slow but steady progress in the US, and worse news for Europe, Japan, and the rest of the world.
  • Keynes says buy and build.  Perhaps my economic view is coloured by my alma mater’s famous mathematician-turned-bursar-turned-economist, but a sure-fire method to help along a country in recession is for the government to start spending like a rap star.  Hire folks to do anything, but maybe something relatively useful in the long-term like repair infrastructure.  The ASCE helpfully puts a $3.6 trillion price tag on getting the US infrastructure up to scratch by 2020… that’s about 20% of US GDP.
  • Record low interest rates = BORROW NOW.  Look, I hate the national debt as much as anyone – it does indeed steal from later generations to pay for things today.  But particularly in the case of infrastructure, you’re already screwing later generations through depreciation (with crumbling roads and such, it’s literal depreciation, rather than a book entry).  So today’s record low interest rates (see chart above – the same message goes for the US as many other governments), the message is clear: BORROW.
  • Why are rates so low?  Too much capital lying around.  Though it seems to disagree with the first point, there seems to be a huge surplus of investable capital around.  It’s like investors have become so risk-averse, or have such a lack of ideas, that they’d rather lock up cash for 10 years, being paid nothing (or less than nothing, in real terms) than try for ‘risky’ propositions.  The triumph of return of capital over return on capital continues to reek.
  • Investors: you are committing self-harm buying bonds at these rates.  Yes, bonds have made amazing returns for decades.  Rates could still go lower – indeed, now that the zero-bound has been shattered by the likes of Switzerland (see above), they could in theory go wherever.  But remember why you are saving/investing in the first place: to generate a return on your savings.  Otherwise you might as well store your currency behind a tile.  Stop being fearful.

In sum: these low yields are a joke.  It is implicit transfer from savers to borrowers.  But instead of just being mad at the situation, I encourage the governments of the world to take advantage of savers/investors with a surplus of capital and fear, and a dearth of decent ideas.  Borrow loads at these low rates, and use the proceeds to bring forward decades of investment.

End soapbox.


5 thoughts on “Mo’ money, mo’ problems: too much capital

  1. You forgot to mention the race to the bottom. Easiest way to fix your economy is to keep your currency nice and weak; increase exports and prevent imports being sucked in. Very low yields = nice weak currency. Except everyone is playing the same game, and its all about keeping up with the Abe’s. “I’ll see your 50bn of QE, and raise you 25bn of unconventional monetary easing”. So rates just have to go lower and lower just to keep up. If you’re a reserve currency you’re fighting a headwind of capital inflows, and you have to cut even more even faster. This can only end when we get plenty of inflation, in plenty of countries.

    I’m still long bonds, even at near zero yields (if not substantially negative ones with very low vol, i.e. 2 year german). There’s still carry on these bonds; heck as long as the yield curve slopes up there is carry even at -250bp of yield. There is a lower bound where it makes sense to just hold cash (and store, and insure it), but I’m not sure exactly where it is, and its probably below zero.

    Very low rates don’t seem to have helped the real economy much, have they, just investors (if not savers)? Asset prices have gone up, but there hasn’t been a massive injection of real investment, leading to jobs and productivity growth….

    Liked by 1 person

  2. Thanks Rob. Agreed on the competitive devaluations causing worldwide low rates. Guess I’d just like to make the game help ordinary folks via fiscal policy, but maybe that’s asking too much!


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