The ECB rumor mill over the past two weeks hyped the possibility of a shock-and-awe stimulus package, on top of the shock-and-awe stimulus packages the ECB has already implemented, namely negative interest rates, liquidity facilities, and QE.
The entire German government bond market, even 30-year bonds have negative yields. And the German economy shrank in the last quarter. That gives Germany two out of the last four quarters where its economy shrank – despite negative interest rates from the ECB and despite the negative yields on its government bonds, and despite the negative yields among many corporate bonds.
In other words, the German economy, the fourth largest in the world, is hitting the skids despite or because of negative yields. And now the ECB wants to flex its muscles to get yields to become even more negative.
And there are folks who want to prescribe the same kind of killer application to help out the US economy – which is growing just fine.
The yield on US Treasuries is between 1.5 and 2.5%, which is a near-to-minus-zero yield in real dollars. The yield curve is actually inverting, with longer term Treasuries selling for more than shorter term Treasuries, presumably because investors are betting on a recession in the short term.
Yields of 1.5 – 2.0% over 10 and 20 years seem like an awfully strange bet on prices over the next couple of decades, but I don’t think UST purchases are made with that in mind. In a hard-currency economy, precious metals will also have near-zero to negative rates of return due to storage costs. And that’s what I think is mainly driving interest rates at this point: government bonds are good as gold. They’re a comparatively safe place to park oodles of cash.
One assumption is that central banks will never let the government default, and another is that continued productivity gains will grow the economy. In that sense, EU and US bonds are a long term bet on the persistence of the post-World War Two order, the most prosperous time in human history. So far that bet looks pretty good. But if, say, Trump wins in 2020 and New York and California tell the rest of us they’re out of here, then those bonds will be instant toilet paper. Of course, everybody knows that, which is why New York and California will probably stay put. Or will they? Like I said last post, people seem to be spoiling for a very big fight.
The alternative is Biden or Warren wins, thus placating the urban centers but doing nothing to ease the underlying existential stresses. Because with the Democratic capture of the Executive and Congress, it will be Payback Time, big time.
So with nothing else out there and the country on the verge of blowing up, the rich buy government bonds and large, remote tracts of real estate.