The sign of the times

[tsfx]

Thanks for your detailed explanation.

however, i never really argued about "governments no longer have to borrow to spend in deficit" because this statement by itself is obviously clear in this money printing environment.

So, it doesn't change my thinking. My point was that the whole idea of "money creation" only works if REAL money accepts its presence. Of course it doesn't increase the money in the economy, it only lowers the interest rate on issued bonds thus making the bond price go higher.

What i'm saying is that this "printed" money isn't REAL. It's working hour price is 0. Noone ever had to work for it. And it competes with REAL money that have a working hour price >0 (the price an "avg" person gets from going to work)

Now, for as long as there is REAL money buying of government bonds, the "printed" money also has power and everything is fine. Rationally speaking, the higher the bond price goes (lower interest rate) the less attractive it should get for the REAL money. But that doesn't seem to be the reality. That's why i'm saying the system is very crafty where CB's are basically betting on the unknowingness and/or ignorance by the general public.

Theoretically speaking, if the bond yield is =< 0 then there is NO debt.

So, as in the case of Japan, even though the debt/gdp ratio is ballooning, its zero yield literally means there is no debt. But having zero rate without continuosly going more and more negative (aka without the rise in bond prices) the general public will eventually pull the plug on their holdings due to no return on invested capital (add to that the worsening of demographics) and make this no debt become a bankruptcy in a matter on hours and days.

I understand very well that even though nominal debt levels are seemingly through the roof, it's the near zero interest rates (thanks to money printing) that makes the whole debt problem non existent. For now.

And it will be the zero/negative rates that will (if at all) be the cause of structure break in the bond markets

But, of course, this must be viewed case by case.

Economies with increasing GDP must run an aggregate deficit or they will starve their economies of the money needed for commerce and will eventually fall into deflation. Assuming GDP is growing, not only can deficits be too large, they can also be too small.

I'm not sure i can agree with that.
What about Germany ?

though, i'm not too familiar with the topic to make reasonable arguments here.

 

[Pekelo]

11. The kids on the net effect stock prices.

https://ftalphaville.ft.com/2020/02...LJX0w#myft:notification:instant-email:content

 

[piezoe]

Thanks for your detailed explanation.

however, i never really argued about "governments no longer have to borrow to spend in deficit" because this statement by itself is obviously clear in this money printing environment.

So, it doesn't change my thinking. My point was that the whole idea of "money creation" only works if REAL money accepts its presence. Of course it doesn't increase the money in the economy, it only lowers the interest rate on issued bonds thus making the bond price go higher.

What i'm saying is that this "printed" money isn't REAL. It's working hour price is 0. Noone ever had to work for it. And it competes with REAL money that have a working hour price >0 (the price an "avg" person gets from going to work)

Now, for as long as there is REAL money buying of government bonds, the "printed" money also has power and everything is fine. Rationally speaking, the higher the bond price goes (lower interest rate) the less attractive it should get for the REAL money. But that doesn't seem to be the reality. That's why i'm saying the system is very crafty where CB's are basically betting on the unknowingness and/or ignorance by the general public.


So, as in the case of Japan, even though the debt/gdp ratio is ballooning, its zero yield literally means there is no debt. But having zero rate without continuosly going more and more negative (aka without the rise in bond prices) the general public will eventually pull the plug on their holdings due to no return on invested capital (add to that the worsening of demographics) and make this no debt become a bankruptcy in a matter on hours and days.

I understand very well that even though nominal debt levels are seemingly through the roof, it's the near zero interest rates (thanks to money printing) that makes the whole debt problem non existent. For now.

And it will be the zero/negative rates that will (if at all) be the cause of structure break in the bond markets

But, of course, this must be viewed case by case.






I'm not sure i can agree with that.
What about Germany ?

though, i'm not too familiar with the topic to make reasonable arguments here.

I have read your post. I'll have to think about it some. I may get back to you later. Of course, what gives money value is what you can exchange it for including a tax liability. And that's why a nations fiat currency is, in effect, backed by productivity and taxes. You will have to beg, borrow, steal, or work for fiat currency to pay tour taxes.

I definitely don't subscribe to your assertion that if a bond yield is zero there is no debt. I think you have confused nominal and real yields. The nominal yield could be zero but the real yield positive if there is price deflation. In any bond transaction involving a non-inflation indexed bond, the only thing that matters is buying power borrowed versus buying power paid back relative to the nominal currency's change in buying power over the term of the Bond. . .

 

[Overnight]

"This note is legal tender for all debts, public and private."

So what is that really saying?

 

[tsfx]

I definitely don't subscribe to your assertion that if a bond yield is zero there is no debt. I think you have confused nominal and real yields. The nominal yield could be zero but the real yield positive if there is price deflation. In any bond transaction involving a non-inflation indexed bond, the only thing that matters is buying power borrowed versus buying power paid back relative to the nominal currency's change in buying power over the term of the Bond. . .

No i haven't because there is no such thing. I'm talking about market rates aka quoted bids/offers. That's the only thing that matters at the end of the day to MAKE a trade. Your "real" yield is priced in the market rates. If the price is diverged from inflation then it's the markets desire.

Secondly, by looking it through your perspective, if the rate is constantly zero, why would i care about the purchasing power of bonds ?

So what, if my purchasing power is now less compared to when i borrowed ? I'll just borrow more now to offset the change. If the interest rate = 0 and principal is rolled (refinanced) forever then my cost of borrowing is zero, hence, there is NO debt.

if an assets value = 0, then that asset wouldn't exist, doesn't matter what it is. It's as simple as that, everyone else is just overthinking and analysing things. Noone ever thought that we'd get to 0 or negative rates and yet here we are.

 

[AKUMATOTENSHI]

30K is not that far away. Don't hot the damn panic button yet. Humans have been dealing with much worse on history and still managed to grow the global economy. I see more of an buying opportunity being created. The PPT and others can manage the issues.

Akuma

https://en.m.wikipedia.org/wiki/Fearmongering

 

[piezoe]

No i haven't because there is no such thing. I'm talking about market rates aka quoted bids/offers. That's the only thing that matters at the end of the day to MAKE a trade. Your "real" yield is priced in the market rates. If the price is diverged from inflation then it's the markets desire.

You may want to rethink this. As no one knows with certainty what the real rate of return will be at maturity it is of course impossible for markets to take the real yield at maturity accurately into account in the price of a bond. The best that can be down is to make an educated guess -- a projection if you like -- what the inflation rate going forward will be and price the bond accordingly, considering it's nominal yield. This is what the market mechanism does. But why would this make debt disappear if the nominal yield on a bond is zero? It wouldn't of course! It would simply mean that the issuer was anticipating deflation at some projected rate over the term of the bond.

I think you must be a fairly new investor if you've yet to realize the importance of real rates, and the unfortunate reality that markets are wrong much of the time. There is always risk.

 

[FriskyCat]

Some very interesting concepts posted there tsfx. The real vs printed money argument is really the center of it all.

 

[piezoe]

So what, if my purchasing power is now less compared to when i borrowed ? I'll just borrow more now to offset the change. If the interest rate = 0 and principal is rolled (refinanced) forever then my cost of borrowing is zero, hence, there is NO debt.

Have you ever tried to have a conversation with someone who just continued to spout nonsense and finally you had to look for a way to end the conversation without being insulting or judgemental. The best thing to do might be just to walk away hoping the don't follow you. Sadly I could not muster the discipline to do that.

 

[tsfx]

You may want to rethink this. As no one knows with certainty what the real rate of return will be at maturity it is of course impossible for markets to take the real yield at maturity accurately into account in the price of a bond. The best that can be down is to make an educated guess -- a projection if you like -- what the inflation rate going forward will be and price the bond accordingly, considering it's nominal yield. This is what the market mechanism does. But why would this make debt disappear if the nominal yield on a bond is zero? It wouldn't of course! It would simply mean that the issuer was anticipating deflation at some projected rate over the term of the bond.

Look, you are overthinking here. I presented you with a hypothetical environment of borrowing with rates being at 0. In this case, if i borrow, i have to pay back principal + interest. What is the interest payment in this case ? i would guess it's zero if the borrowing rate was zero ? Now if the time comes to pay back the principal then i will issue new bonds with a rate being again, zero. what is my payment now ? Again, zero. So, putting 1+1 together i never have to pay back anything because i keep on refinancing the old debt with a new one with zero interest rate.

This is an hypothetical environment for the sake of explaining how lower and lower interest rates actually keep on diminishing the debt burden until to a point when rates go negative and you are ACTUALLY getting PAID to borrow. So, not only have your debt dissapeared, your borrowing flipped into being an investment with an actual return! This IS reality. Imagine that, you get PAID to BORROW. Back in august 2019, there were 16 trillion of debt with negative yield in the world.

The best that can be down is to make an educated guess -- a projection if you like -- what the inflation rate going forward will be and price the bond accordingly, considering it's nominal yield.

Market isn't making any educated guesses. None of that matters any more once the CB's started printing. Real rates have been negative for years but they still keep on buying the bonds. Why ? Because the game they "anticipate" is that the central banks are going to keep the bid on bond prices so that they know bonds aren't falling anywhere. They no longer care about the interest rate as long as bond price is higher tomorrow than it is today. That's why they buy negative rate bonds. That, and ofc the unknowingness and ignorance of simple people who have no relation to economics and simply keep on investing in their pension funds hoping for a better retirement life (not to mention that in many countries it is MANDATORY to have a pension fund account which means it's MANDATORY to invest in the bond market REGARDLESS of the interest rate.)