We are told time and again that the major economies of the world, who are borrowing funds to finance their deficits, will be going bust any time soon. It was, therefore, interesting to note in this morning's Financial Times that:
Foreign investors scooped a near record amount of US debt in August and sharply increased their holdings of Treasury bonds, according to the latest Treasury International Capital report.
August was marked by fears that the US economy faced a possible double dip recession and yields on Treasury bonds fell sharply as bond investors priced in a move by the Federal Reserve to start another round of quantitative easing. The Fed announced in August that it would start reinvesting principal payments from its agency debt and agency mortgage-backed securities in longer-term Treasury securities.
What can be interpreted from this?
The first, obvious conclusion is that investors are utterly irrational if those who predict economic devastation for Western governments are correct.
Alternatively, there is now no such thing as the long-term, and therefore all action is completely and utterly speculative. But in the case I wonder where this money will go when it pours out of Treasury bonds? There is no obvious destination.
Alternatively, and perhaps most plausibly, we're not going bust any time soon. Nor is the USA. In fact, in the absence of any sign of serious economic activity relating to growth, new products, innovation, investment or enterprise in the market sector the only sensible place to put your money is in government bonds because like it or not the government are the only people who can use money to good effect at this point of time. And what the markets are saying is that they want governments to act proactively with their money to clear deficits by promoting growth.
That's not what the naysayers want to hear.
But that's what the serious money is saying.
I'm with the money on this one.
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“the only sensible place to put your money is in government bonds because like it or not the government are the only people who can use money to good effect at this point of time”
An interesting viewpoint, which encapsulates neatly where we are at the moment. You are quite right that the government can use money at the moment. But I think a lot of people believe that gilts are going to drop sharply from mid-2011, as soon as the US start making noises about interest rates rising. There is a high chance that 2011 will be a repeat of 1994 (the year of the great bond massacre).
From the viewpoint of a person sitting on a pile of money, bonds are a very risky idea. But from the viewpoint of social utility, you are probably right. The problem is, pretty much all people sitting on cash are interested in the returns it can generate in absolute, rather than in social terms. In other words, you give money to the people who produce the best return, not to those who need it the most.
Anyway, the stock market has clearly been the place to be over the last 18 months. FTSE up 55% in that time. We are in a bull market and a lot of money has missed that rise. The final quarter will see money pour in and the market rise strongly, as it always does, because those who have missed the bull run desperately need to find some gains.
The real difficulty about deciding where to invest will arise next year, which will be very difficult across all asset classes.
It would be much healthier for the economy if the profits earned by labour actually went to labour, so that they can spend and get things moving again. Instead all the surplus ended up in the pockets of the already rich who don’t know how to spend it. And whilst land prices are sinking because of the recession the banks are still able to cream off the rent via outstanding mortgages.
@mad foetus
i thought you might do better than that
Of course gilts will drop when rates rise – they have to – it is a mathematical relationship
But given that bull is seriously overdue to break there will be even more cash for gilts soon
@ Richard.
Demand for UK bonds surely a symptom of the huge and unprecedented QE (printing money)programme. That cannot continue indefinitely as you appear to advocate as our currency would ultimately suffer huge loss of value (even more than it has so far).