There was an article in the Wall Street Journal yesterday in which the opening line was enough to grab attention:
The world is running out of safe financial assets.
The Wall Street Journal is heavily paywalled so a synopsis will do: what it is important to realise is that the assets in short supply are, most especially, government bonds. The main reason is that government bonds now play a crucial role in the world's financial markets as collateral when lending.
This is a relatively new phenomena: until 2008 companies were willing to put massive sums on deposit with banks without requiring security to ensure that they would be repaid. Then the banks failed. As a result what became apparent was that banks' capacity to repay was dependent upon the whim of the governments who were really underwriting their solvency. The significant growth of what is called the repo market is the consequence. To simplify somewhat, companies do not now deposit money overnight, leaving them as unsecured creditors of the bank. Instead they sell the bank the most secure and financially stable asset they can use (government bonds) with a contract that guarantees them the right to require the asset the next day with the price adjusted for overnight interest. What that means is that if the banks fail then the companies depositing cash overnight are not unsecured creditors; they do instead have an asset to reclaim. What that means is that their risk is reduced, which is a good thing. It's like the bank deposit guarantee most personal customers enjoy and rely on. At the same time the liquidity of the world's markets is increased, and again that's of benefit.
But there's a problem: there are not enough government bonds to go round. The European Central Bank is actually having to lend bonds it has acquired under the EU quantitative easing programme back into the market to fulfil this role: it is effectively standing as guarantor as a result. And bond borrowing is now so common that I am told that the risk of one bond being used for security multiple times is real: that blows the whole purpose of the transaction apart.
The answer is obvious, of course. We need more government debt.
It so happens that what the markets want is what the economy needs. There is a need for massive increases in government borrowing to fund new infrastructure problems. Only that can really address to social and economic issues we really face. And we can afford it, because people are still desperate to buy such bonds even with equities at absurdly high levels. When the markets crash (it is a when: this time is not different) bonds will be the only asset everyone wants.
Only dogma is preventing a solution to the problem the world now faces, which is that governments just aren't spending enough.
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The EU is discussing how to implement meaningfull energy efficiency measures i.e. how to rennovate the +100 million or so of houses that need a complete energy rennovation. One would think this would lend itself to gov’ financing (and if you must – bonds) – nope – they still talk about private money. Pathetic. & yet EE actions could generate well paid, long term jobs – in places like… Poland (as well as other countries). Don’t hold your breath – cos in my estimate nothing will happen – the Euros will rumble round in cricle while the Finance half wit in Berlin wrings his hands about gov debt.
This is exactly what the Green New Deal was for
Sounds like a case of neo-liberalism’s karma running over its dogma.
How very interesting! If only the UK mainstream media would point this out it might become even more obvious what a complete sham austerity is.
Well, well. How the might hath fallen?
Neo-lib dogma can’t even save…..well…..neo-liberalism. Markets are hoovering up assets and public goods so fast and sucking the value from them thus making them unsafe.
Again it really does seem like the age of the absurd. It’s almost as though we are entering a black hole and we do not really know what is going to happen.
Regulators aren’t helping. Basel reg capital requirements encourage banks to leverage longs in government bonds (since 0% RWA) rather than lend to SMEs (125% RWA). Add to that pension and life assurance prudential requirements to hold government bonds. We’ve created a system where everybody needs safe assets while taking risk is bad. At the same time everyone wonders why productivity is poor and we seem to be in “secular stagnation”. Anyone like join the dots or is that option only to those with a PhD in macro economics?
It isn’t just the left wing that thinks this is an opportunity to fiscally stimulate. Many in the markets are amazed that more global governments haven’t jumped at the chance. German 5-year bonds at -0.5%; paid to issue debt and still Germany isn’t keen! With the 10-year gilt yield at 1.2% and the 30-year at 1.9%, the UK clearly has an historic opportunity to issue govt debt for infrastructure. It would be one thing if gilt yields were 10% or even 5%, but if you believe that you can’t deliver a return of capital of >1-2% over 10+ years from infrastructure then, frankly, you should just turn off the lights.
Agreed
I don’t have a PhD in macroeconomics
The whole current system of money creation (whether in the form of bank lending or government spending) is collectively underwritten by taxpayers. The equivalence of money created via bank lending or government spend acts an implicit tax payer subsidy of the financial sector. Still more money flow more economic activity is a good thing which is why few think a gold standard (or Positive Money) is a good idea.
I think it is actually the tax regime that is most important in ensuring that the money flows in productive directions and prevents inflation getting out of hand, ensuring the distributional effects are not negative on growth and that there is sufficient incentive for risky innovation and investment rather than only speculation and rent extraction.
We are in agreement