There’s just not enough government debt to meet demand

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The FT has published this comment today:

Eurozone central bankers, struggling to boost the currency area's flagging recovery, have received help from Beijing in delivering their €1.1tn quantitative easing plan thanks to sales of German government debt by the People's Bank of China.

The PBoC's reserve management wing, the State Administration of Foreign Exchange, has been selling some of its German government bonds since the ECB began buying them in March.

The FT then adds:

Its sales of bonds are making life easier in the dealing rooms of Europe's monetary powers, where traders have been handed the difficult task of finding €60bn of mostly government debt to buy each month as part of the QE package.

Of that purchase package at least €10 billion is German government debt, and the simple fact is that there's not enough of it around to make that an easy task.

This though is potentially just the start of the problem of a shortage of high quality government debt. As I noted a while ago, the same debt that governments are buying using largely misguided QE policies that have little sign of now working are exactly the same assets that much of the world's capital is looking for as a safe haven. QE is then spiting the market that wants more debt by going out and cancelling it.

The answer is, of course, obvious. First, we need more quality debt. That means government must create more.

Second, they must do so wisely. That means that they must use fiscal policy to create new infrastructure investment, ideally via a National Investment Bank in the case of the UK.

And third, only in the event of a downturn should they resort to QE, which in the case of the UK has to be People's Quantitative Easing, because it is only by combining monetary and fiscal policy in this way that we have the mechanism needed to beat the global economic doldrum surely heading our way.

You'd think none of this should be rocket science. Apparently it is to those spending billions. Which is probably the most worrying thing.


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