Good as Gold

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.

letterman ranch
David Letterman’s house, in the middle of 2,300 acres of Nowhere, Montana.

9 thoughts on “Good as Gold

    1. Yes. This messaging has been around as long as you and I have been alive. I was in my 40’s when I realized the underlying dynamics which purportedly justify the message will never, ever change.


    2. Germany is substantially export oriented. The Germans are such a peculiar people, so skilled at making things, that 40% of economic activity is done making exports. If you look at domestic spending, C+I+G, Germany is much more stable. They have fairly volatile GDP because they’re so export focused and because they don’t have full control over their central bank, to iron out the swings.

      Interest rates have been falling for many decades now, in real terms and in current dollar terms. Part of the reason is lower and lower inflation since the 70s but another part seems to be a lack of things to invest in. Where’s the growth gonna come from? You can’t invest in China and they’re done their explosive growth phase anyway, the west is in steep decline, India’s full of half wits, where do you invest? As national populism takes root, and wages rise, corporate profitability will be harmed. Will be very hard to get return in coming decades.


  1. Could this be viewed as a tax, paid by people who have a vested interest in the status quo? Who buys these bonds? What happens if they don’t get sold?

    A normal person would look at negative interest rates and say “thanks, I’ll just put it in the back at .5%”, but FDIC coverage stops at what, a quarter million? So if you’re concerned about the music stopping, you do what you can to keep it going because there is literally nowhere else to put it.


  2. The bond market is a bug waiting for its windshield. The level of global debt is beyond the comprehension of most ordinary brains. We can print numbers with the appropriate number of zeros. But we can’t really grasp what it means. Governments can continue to inflate the bond bubble with their manipulation of interest rates and money printing. But only for so long.

    Even if you think this is unlikely to blow up, are you really really sure? Gold (and/or silver) is insurance against the knavery of politicians and central bankers.


    1. I’ve been told this all my life. My father tells me he’s been told this all his life. People have lost their shirts betting on the collapse of the dollar.

      Politically, the US and EU are untenable so eventually it’s going to happen. In the meantime a lot of seriously smart, wealthy people are buying US and EU member country’s bonds.


  3. Anyone in North America be to Letterman’s house on a few tanks of gas and a few Monster energy drinks in about 30 hours at most. He’s not nearly as remote as he thinks he is, though too remote for anyone to hear him scream. Letterman owns only as much property as he has the muscle and Kalashnikovs to defend. In Mexico, the rich tend to huddle next to one-another in cities, particularly Mexico City. Outside, it’s dangerous.

    Liked by 1 person

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