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Entire German bond yield curve back in sub-zero territory (reuters.com)
183 points by nabla9 5 months ago | hide | past | favorite | 280 comments

> Falling U.S. Treasury yields were adding to pressure, she said, adding: “If U.S. Treasury (yields) were much higher... we would have been talking about a different kind of level.”

This is a global phenomenon. Real 30-year yields are steeply negative in the US as well, with nominal yield at 1.85% and year-over-year CPI above 5%.

But it helps to zoom out. This is part of a multi-decade trend in ever lower 30-year yields stretching back to the Regan administration.


I challenge anyone to find a channel that long and that persistent (except for possibly the CPI). Keep following and you make the prediction of nominal 30-year yields touching zero within 3 years.

Somebody is on the wrong side of this trade in a big way.

Those who say the inflationary spike is temporary and will mean revert are buying bonds with wild abandon because once you break zero, you can always go deeper negative. And as yields fall, bond prices rise.

Those who say we're on the road to permanent inflation and possibly more are looking for inflation hedges. The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast.

It's also possible that both sides are wrong and what will actually happen will be unlike anything that has come before in terms of the ferocity and diversity of forces at work and ultimate pain/suffering.

For right now, both extreme sides can point to data supporting their outlook. But for how long?

> Somebody is on the wrong side of this trade in a big way.

The reason why European yields are so low is because financial institutions are forced to own govt bonds. That is it.

Europe is one of the only markets where you really see this, yields in the US could certainly move higher or lower but they trade at a rational level. In Europe, the price is just wrong (because no-one is doing the trade to be right or wrong, they are doing the trade because of regulations).

Also, making some kind of linear prediction for rates based on the drop over the last 40 years makes no sense. Rates are actually stationary, but the reason they have trended strongly over the past four decades is because of changes in inflation expectations and aging of society which has brought down the natural rate of interest significantly. Outside of this, the underlying properties of rates are stationary...the same as every other valuation measure.

> The reason why European yields are so low is because financial institutions are forced to own govt bonds. That is it.

Same in the USA. All bank deposits need to be balanced out with a certain number of US Treasury bonds / notes as a reserve.

There are also huge institutions, such as the Social Security Trust Fund, who was forced to buy US Bonds from the 1980s through 2000s to prepare for the baby-boomer retirement cycle. So lots of groups are in fact, "forced" to own US Treasury bonds.

No, it isn't the same in the US.

Reserves are vault cash plus deposits at the Fed. You cannot use USTs to count towards your reserves (and it wouldn't matter if you could, the reserve ratio isn't a binding monetary policy tool, excess reserves in the US banking system are close to $1trn).

You are right that pension funds own a lot of bonds...this makes sense because there are very few long-dated securities that can be used to match liabilities...but the US pension fund system is relatively dynamic, and has a big allocation to alternatives. The European savings market is also totally different to the US: outside of govt bonds their financial markets are essentially non-existent relative to the US, lots of people save by putting their money into banks who then invest in govt bonds (the reasons for this are slightly complex, but loan demand in the US is relatively strong in the US, and non-existent in Europe so banks own a ton of govt bonds there), insurance sector is far larger (and Solvency II means govt bonds...lots of them), and there are more DB than DC schemes...so pension funds are far smaller proportionally (and the demand for non-bond assets is, typically, smaller). Pension funds are always going to own a lot of USTs but you just don't see the same pressure on US yields.

Again though, don't take my word for it...look at the price. The Italian 10yr has traded under the US for the past five years or so...that clearly makes no sense.

Can you expand on that? What regulations require European banks to hold government bonds? If it's obvious to everyone that Euro bonds are too expensive, why don't American hedge funds short them?

I was under the impression that Euro-zone bond rates were so low mainly because the market is expecting economic stagnation and a too-hawkish ECB.

Why would you short them? That sounds like a terrible trade. I am not sure why they would have to be "American" either.

Hawkish??? The ECB? They own 50% of the govt bond market. They have been throwing literally trillions at banks. Because of the Draghi "whatever it takes", they are the most dovish central bank in the world by far, it isn't close. They were doing massive QE worth trillions when growth was 2-3%, permanent QE. Definitely, the ECB is a big reason why rates are low though, because they have removed 50% of the supply of risk-free assets ("risk-free"...some European govts are obviously insolvent so..."risk-free" is a somewhat unclear concept).

And no, Europe isn't economically stagnant...it is a difficult to be brief but the main issue with any high-level comment about Europe is that you have a collection of countries that are almost totally economically dissimilar. So everything is just totally imbalanced, and there is no real way to balance things (the ECB is making this worse). So you can't really talk about European growth being stagnant or rates being affected by growth...because they are just totally separate, ECB policy is appropriate for maybe four countries in the EU, and no-one else...so it is difficult to apply any kind of logic to that process.

There is no way to be brief. But the EU-level regulations are solvency ii, bank capital rules (some of these rules are national, but there are EU-level rules too), and the saving culture of Europe (i.e. no financial markets, suspicion of capitalism, suspicion of decentralization). A lot of the rules that relate to pension funds are only relevant at the national level (because the structure of pension funds/savings vary by country)...again, it is tricky to generalise because the economies in the EU are generally nothing alike each other.

I use Bitcoin to satisfy my inflation-hedging appetite. I wonder to what extent cryptocurrency enthusiasm is suppressing gold prices, as increasing number of people view Bitcoin as a viable inflation hedging alternative to gold.

If Bitcoin didn't exist, I would probably own more gold.

> If Bitcoin didn't exist, I would probably own more gold.

Do you have any evidence that gold is a hedge against inflation, or are you simply following financial folklore?

> We find little evidence that gold has been an effective hedge against unexpected inflation whether measured in the short term or the long term. The gold as a currency hedge argument does not seem to be supported by the data. The fluctuations in the real price of gold are much greater than FX changes. We suggest that the argument that gold is attractive when real returns on other assets are low is problematic. Low real yields, say on TIPS, do not mechanically cause the real price of gold to be high. While there is possibly some rational or behavioral economic force, perhaps a fear of inflation, influencing variation in both TIPS yields and the real price of gold, the impact may be more statistically apparent than real. We also parse the safe haven argument and come up empty-handed. We examine data on hyperinflations in both major and minor countries and find it is certainly possible for the purchasing power of gold to decline substantially during a highly inflationary period. When the price of gold is high in one country it is probably high in other countries. Keynes pointed out “that the long run is a misleading guide to current affairs”. Even if gold is a “golden constant” in the long run, it does not have to be a “golden constant” in the short run. Conversely, current affairs are possibly a misleading guide to the long run.

* http://www.nber.org/papers/w18706

I don't find this persuasive at all.

Seems like they looking at this from an institutional perspective of hedging a single currency, looking for tight correlations over a short time periods. I don't care if there is a year or 5 of lag in either direction, or if gold outperforms currencies in a period in a non-correlated way. Funny that they quote Keynes because it seems like a superlatively Keynesian perspective on gold.

I'm concerned about the simultaneous inflation of all fiat currencies that arises from adversarial currency wars to game trade flows and reckless Fed policy devaluing what's in my bank account as a hidden tax on saving.

I want an asset that is resistant to devaluation of money and the historical examples of governments leaving the common man as bag-holders when a currency fails. I want something I could bury in the ground and feel confident that it'll be worth more when my grandchildren dig it up.

Maybe in a pedantic sense, "gold is a hedge against inflation" is "folklore" because the correlation is loose over short time periods, but over long time scales it works pretty well. Until asteroid mining is prevalent (and possibly beyond that) an ounce of gold will likely continue being enough to buy a good suit.

> I don't find this persuasive at all.

IMHO you have the burden of proof backwards. Gold being a good hedge against inflation has been (hard money) dogma that's been repeated over and over, but what examination of this claim has there been?

> I want an asset that is resistant to devaluation of money and the historical examples of governments leaving the common man as bag-holders when a currency fails. I want something I could bury in the ground and feel confident that it'll be worth more when my grandchildren dig it up.

Is there evidence / supporting documentation that gold is that asset? If you believe that gold is that asset, why do you believe it? Is it just a matter of trust/faith of what you've heard, and the authorities that you heard it from, or did you examine some data to come to this conclusion?

Gold has been valuable for about as long as recorded history. It has more evidence of value and a longer history of that evidence than probably any other asset in existence.

Since you're just tasking me with asking a bunch of easily google-able questions, I'm not sure what the point you're trying to make is. Are you just being contrarian, or is there a different asset that you think is a better durable store of value, or do you disagree with the concept of durable value?

Feels like you have a dogmatic repulsion to gold, and I don't understand why.

Gold has been used as money in many places for a long time. It hasn't been the only form of money, and people stopped using it and went back to it at times (China flip-flopped).† But it is generally no longer used as money in the modern world: who uses it to buy groceries, or cars, or land? It's mostly used as a store of value: people generally trade cash/fiat for gold because they think they'll get cash/fiat back for it at some later date. There is little in gold as gold that is useful to most people (maybe some industrial process).

As the papers that the podcast pointed to indicate, there is nothing special about gold in protecting against inflation. The price fluctuations of gold, relative to USD, seem to be more crazy than any inflation most people have seen or are likely to see. Most people aren't going to experience crazy inflation unless there's some other crazy things happening in their country/area:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

Per the research done for the podcast, there doesn't seem to be anything special about any asset class that would protect you better than any other asset class.

I think aurum is a fine element, as are argentum, cuprum, platinum, etc. It's just whenever finance (and especially inflation) comes up there's all this talk about gold and I have no idea why. Just because it was used as money in the past, and there was for a time a link between modern cash and gold (as a kind of 'compatibility' layer), does not mean there is any point in treating it as special now. It certainly can be used as a store a value, but why is it better than anything else?

† The Aztecs didn't find it anything too special: it was shiny and flexible, so they used it simply for personal adornment (jewelry).

If gold is not the mainstay of inflation hedgers why would it not be; maybe because people don't know with certainty that they aren't buying gilded tungsten or that virtual gold purchases could disappear at any time? Maybe crypto is the gold that gold could never be?

Something that might move hundreds of percentage points in either direction in a given year seems like a poor hedge against inflation to me.

I would be very surprised if Bitcoin moved more than 100 percentage points downwards :-P

But on a more serious note, this bet is based on the idea that if/as USD hegemony collapses (in ~decade time scale), inflation will accelerate and there is an increased chance that Bitcoin becomes world reserve currency. I believe Bitcoin volatility will decrease as price grows (it already has to an extent), and once it has about one more ~10x increase (reaching roughly market cap of total earth gold supply) the bubble/bust pattern will break and it'll become more stable.

But who knows. I recommend keeping 1-5% of net asset value in cryptocurrency (BTC, ETH, maybe ADA if you like risk, roughly weighted by market cap and ignoring long tail of unproven coins), but it is certainly a very risky investment and securing them has unique technical challenges that make them less suitable for non-technicals.

Yes, in the short term, neither gold nor even gold is a good hedge. Cash will always be superior in the short term unless we're in a hyperinflationary situation. However, on a long enough time scale, gold and bitcoin can function as great inflation hedges. I say this with a little bit of caution especially for bitcoin because it's only a few years old but we know for this short 12 year period that no one has lost money by holding bitcoin for more than 4 years.

I think I'm against this argument, and instead present of Warren Buffet's. If you think gold is a good hedge against inflation, a consumer staple with a safe position (ie. Coca-Cola) is a better inflation hedge.

The same argument would apply to a whole lot of companies in the "necessities" department. They provide every bit of inflation hedge value Gold provides, but also provide dividend and stock appreciation.

There are just two years in Bitcoin's history when it had a negative return: https://stats.buybitcoinworldwide.com/yearly-candles/

That's what Ponzi scheme sales person would proclaim, until not true.

Discussing historical performance is ubiquitous among all asset classes.

If you're going to try to argue that Bitcoin is a Ponzi scheme, at least put some effort into the argument. This is just lazy and simplistic.

I'll be the pedant to point out it can't move more than 100% on the downside. Which since it has risen more than 100% in less than a year seems like a decent deal although fraught with risk to be sure.

> Somebody is on the wrong side of this trade in a big way.

There's an old adage that equity traders are the short-bus riders and bond traders are riding the long bus. I tend to think there's something to this and thus I tend to think the bond traders are more likely to be right here.

> The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast.

It's going into real estate.

> It's going into real estate.

Some of it is likely going to Bitcoin / crypto as well, even if not everyone agrees on the legitimacy of that space.

Some is going there too, but it's a much smaller piece of the pie. Real Estate also has utility - you can live in it. Gold's utility is much lower - sure you can make jewelry out of it's used in small amounts in electronics. Crypto basically has no utility.

The utility of money is the ability to trade it for any utility that is for sale. Money itself shouldn't have any inherent utility, other than being able to reference any other utility in the amount that the money holds value. It's like a magic wand that can make a wish true. The medium of money is just there to store and transfer the information for the amount of magic you can wield. This is why money is always overvalued compared to the medium's inherent utility.

There are many other things that are overvalued, such as real estate - because there's an expectation that they can be used to trade for something else later. In other words, they're bought solely because they're expected to hold their buying power, i.e. they're used as money. The reason why this happens is because modern fiat money doesn't have this property - it's expected to not hold its buying power.

Now, there is money that holds its buying power - bitcoin. It's expected that in the coming years most of the value from real estate and other overvalued assets will transfer into bitcoin, because there's no reason any more to own them other than for their utility.

> There are many other things that are overvalued, such as real estate

I'm not sure RE is overvalued. There's a shortage of houses at a time when Millennials (the largest generational cohort so far) are hitting peak household formation.

> Now, there is money that holds its buying power

Bitcoin peaked at around $64K in April 2020. Now it's currently at $38K - it was down to about $30K a month ago. Seems pretty volatile for something that "holds it's buying power".

Isn't it less there being a shortage of houses, and more there being no way to dislodge market jams and speculators?

I know the claim recently was that there were more unoccupied homes than homeless people. Even if you factor out the undesirable/impractical ones, I'd expect if we had some means to unlock that capacity, it would glut and crash the market down to (much closer to) affordability.

It feels like this is one of many problems that are trivial to solve in the abstract, but intractable as long as we worship private-property rights. A simple fix would be an >100% annual value tax on unoccupied dwellings. The vacant-50-weeks-a-year vacation house, or the 'investment property' you're holding to sell in a few years, becomes an instant financial grenade, where it's better to hand the deed over to your pizza delivery guy as a tip than to be not living in it when the tax bill comes due.

> Crypto basically has no functionality.

Transferring payments across the world is functional, and yes, the traditional financial system also does this, but it doesn't mean crypto has no functionality.

Edit: Previous statement I was responding to has changed. I still don't agree that crypto has no utility though. I agree with almost everything I was responding to except that part. Yes, real estate has more utility, for sure. To me it doesn't matter that crypto has some overlap with traditional finance. This is an iteration on technology, which has its own pros/cons, but some folks are trying to come up with something better. Time will tell if that succeeds or not. IMO, it's too early to tell. You can also see that I wasn't the only person who responded to the parent comment that Bitcoin may be a competitor to capital flowing to gold as a potential inflation hedge.

Ok, but as you point out it's not a unique in transferrability - once you've transferred that crypto in the end it's still crypto - you can't live in it or even use it to make jewelry. Locking in your mortgage payment is an inflation hedge and you get a house to live in. Millennials are into the peak home buying years and are now the largest generational cohort. Add to this that we haven't built enough housing to keep up with population growth over the last dozen years or so and this is why housing has gone up so much.

My understanding is that foreign real estate buyers have also pushed real estate prices up. That said I think you make a lot of good points and crypto is about the only thing I disagree with you on.

Money itself is not "functional" in this sense; the point is that real estate provides value and a function other than value.

This is like saying that a rock is functional because it can be transferred from one place to another. Sorry, "being transferred" is not a function that is performed by the object that is being transferred.

If you have technology that can transfer a rock across the world in seconds then I would be interested in that. Same w/ crypto (with the added benefit of crypto not requiring a centralized entity to do so).

My main point is let's wait and see how this new technology evolves instead of just shooting it down. I don't think everything about traditional finance is perfect. Negative interest rates in some parts of the world are one sign of that.

I think we can iterate on traditional finance as well as explore other potential solutions. The aversion to cryptocurrency as a technology, when Bitcoin has only been around for a bit over a decade, seems premature to me.

There have been comparisons of cryptocurrency to the internet, which everyone may not agree with, but what if we just shut down the internet before it really took off? Well, we wouldn't be having this conversation.

I don't think after a decade it is "premature" to jump to conclusions. If someone hasn't been able to figure out bitcoin by now, they probably never will (in my opinion, it takes about 20 minutes to a person of an average intelligence).

When something's too big and heavy to move you turn it into a financial instrument anyway and change (e.g. yap stones) the ownership.

I still think there's something a little bit special about bitcoin. It simultaneously has the properties of modern electronic currency BUT has some elements of "permission-less-ness" like cash or gold.

You could live in the same real estate 10 years ago, when its price was 3 times lower. So 1/3 of real estate price comes from utility, and 2/3 is pure fiction. More precisely, 2/3 of real estate price represents its utility as a storage of wealth.

> Real 30-year yields are steeply negative in the US as well, with nominal yield at 1.85% and year-over-year CPI above 5%.

year-over-year CPI is backward looking: it compares one year ago to today.

Treasury yields are forward looking: If I tie up money now, how much more will I get one year from now.

Last year was pretty unusual. People expect the next year to be different.

One of the losers in the short bonds trade is Alphadyne, a hedge fund that lost 1.5B shorting bonds: https://www.streetinsider.com/dr/news.php?id=18762011&gfv=1

> Somebody is on the wrong side of this trade in a big way.

My understanding is that banks get negative interest on deposits in the banking system over night from many European central banks. So if you pay say -0.x% on deposits then 1.85% over 30y is a bargain.

The fundamental problem with your hypothesis is the time-value of money: overnight deposits can be moved around, well, overnight, but a 30yr bond (for the bondholder, ignoring secondary markets) locks up capital for decades. A bondholder can't take advantage of future preferential interest rates when their capital is already locked up in low-yielding bonds.

This is why bond price and bond yields have an inverse relationship.

>The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast

my guess would be people are putting that money into bitcoin

> This is part of a multi-decade trend in ever lower 30-year yields stretching back to the Regan administration.

Interest rates have been going down, at least in Western countries, with some gyrations, since 1310 AD:

* https://www.bankofengland.co.uk/working-paper/2020/eight-cen...

* https://www.visualcapitalist.com/the-history-of-interest-rat...

Amateurs. Switzerland has a 50 year bond that was trading as low as -0.5%. Imagine that, paying CHF128 to get CHF100 sometime in 2070.

This comes with a whole new approach to finance, such as infinite duration mortgages (you never pay them back). And they even have those with a floating interest rate, in case you would like to bet your entire net worth on the idea that rates will stay this low till you die (and till your children, who will inherit the house with the mortgage, die, and till their children ...). Brave new world.

You want more fun? Here is the Portuguese Central Bank, some time ago, mandating all banks to apply negative rates to their mortgages within 10 days, in case the corresponding Euribor happens to be negative.

(link in Portuguese) https://www.bportugal.pt/comunicado/instituicoes-obrigadas-r...

These mortages have been available in NL and DK as well ( I had one in NL ).

My mortage did not pay me yet, but the negative rate was eating into the markup ( ~1% ). So for years I had a mortage with about 0.5% interest. I know of DK people actually got money out of their mortage.

I think it is notable that Switzerland also has very favorable capital gains laws though, at least for private investors. Could hold stocks, gold / silver or crypto in Switzerland and not pay tax on gains as long as you hold them for 6 months or more, and didn't make more than 50% of your income from capital gains. [1]

[1] https://thepoorswiss.com/capital-gains-switzerland/ (mainly talks about stocks but applies to capital gains in general).

It’s also notable that Swiss cantons impose various levels of global wealth tax. Fairly small I believe, around .5% mostly.

That sounds small but over 40 years that would net a portfolio about a quarter smaller than in a country without one.

In Switzerland you pay tax on the rent you could in theory receive as a landlord minus maintenance cost and mortgage payments. I suspect that this is a far bigger contributor to infinite duration mortgages than the bond market.

Ah yes, save a bit on taxes to get the most dangerous form of financing ever available to the general public, leverage up to your eyeballs. A classic, if something goes wrong the government will help us, right? :). And it's not like an ordinary person would a) really understand what such a mortgage is, b) be able to afford the property without using it.

In Australia for investment properties you can subtract the interest and all cost related to property management from your ordinary salary/wages/rental income

I upvoted you for adding context, but I have a question: minus mortgage payments or minus the interest on mortgage payments? There’s a huge difference.

In an eternal mortgage you are only paying interest, so interest on the mortgage I believe.

inflation, negative nominal rates (to say nothing of real rates) and if the central banks so much as breath towards tightening the enormous asset bubble they have blown begins imploding...

a lovely job, and well done

People have been saying this since 2010. I think it's much more likely that negative yields are the new normal. I expect <10yr yields to go negative in the US eventually. The fed was able to tighten rates in 2016-2017 without anyting bad happening. Everyone keeps thinking things will end badly. Maybe they won't. My $ is on the latter.

Negative yields will not last forever, because negative yields do not really make economic sense. Right now it is propped up by institutional rules and pressures, but those institutions will eventually become antiquated if they have to accept negative real rates of return. Keep in mind that prior to COVID-19 interest rates were rising in the US, and it is nearly certain that interest rates will continue rising (we are seeing a short-term decline in rates now because of market forces, but the longer term trend is upward) for the next decade. Either Congress is going to work through its seemingly endless gridlock and start funding long-term solutions to problems (e.g. infrastructure) and inflation will accelerate as a result, or the gridlock will lead to a default on the debt and interest rates will spike.

One way or another interest rates will be forced to rise, especially at the longer duration end of the yield curve.

Because it never has made an full recovering. 2016 fed only started on making lower balance sheet but never making much progress: https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

Interest rate are similar: https://fred.stlouisfed.org/series/FEDFUNDS

Europe even worse than these above. We leave us without tools for economic troubles when we are declining to raise interest rate and sell assets on business cycle peak.

How does Europe have it worse when the debt to GDP ratio of the combined Eurozone federal governments for example is lower than the US fed? Further, most eurozone countries, like Italy don’t have sub national debt(its regions and cities can’t legally have debt), where as states like California are massively in debt, but that sub national debt in the US is never calculated in debt ratios. Further, the last time I checked, debt held by private households in the US is also much higher on average.

In time of an economic crises, Municipality have a much simpler making of bankruptcy than national government. Same on household. But I call Eurozone worse because ECB have less room on moving interest rate so fewer tools. My above point more was that both are in badly because of never recovering after the previous issues.

I don't see an alternative for managing secular stagnation and growth traps. Metaphorically, you're essentially guiding and supporting someone passing out to the floor so they don't get a concussion when they hit their head ("soft landing"). You're (or rather, your macro economy is) headed to the floor no matter what.

See: Japan [1]

1. What is Japanification? It’s a term used by economists to describe a state of chronically anemic economic growth and feeble inflation or even deflation similar to the conditions faced by Japan since a giant real-estate bubble popped in the early 1990s. It’s used to convey the alarming prospect -- often discussed in Europe, which has staggered economically ever since the 2008 financial crisis -- of sluggishness so deep that it is extremely difficult to escape. Even after Japan’s central bank embraced two extraordinary forms of monetary stimulus -- negative interest rates and asset purchases worth more than the entire size of the world’s third-largest economy -- the country has yet to return to a positive growth cycle strong enough to generate 2% inflation after nearly three decades.

2. What is secular stagnation? It’s a term originally coined by the Harvard economist Alvin Hansen in the 1930s to describe the tendency of mature industrial economies to move toward instability in the absence of large amounts of public investment. It echoed the ideas laid out by John Maynard Keynes in his seminal 1936 treatise, “The General Theory of Employment, Interest and Money.” At the time, the global economy was mired in a deep depression, and theories like Keynes’s and Hansen’s offered an explanation and a prescription for the way out. In recent years, amid rock-bottom interest rates in the wake of the biggest global downturn since the 1930s, another Harvard economist -- former U.S. Treasury Secretary Lawrence Summers -- revived the phrase to capture basically the same idea.

3. Are they the same thing? Essentially, yes. Japanification can be seen as a subset of secular stagnation, with characteristics matching those that have specifically plagued Japan. The country’s rapidly aging and shrinking population has contributed to the slowdown of economic activity, and to a high saving-low investment environment despite ultra-low interest rates. The Bank of Japan also complains about a deflationary mindset that has taken hold of consumers and companies that inhibits higher spending or higher prices. Japan’s example offers other countries an unsettling vision of their possible future. “We’re essentially at the Japanese place,” Summers told Bloomberg Television on March 12. “That’s a place that’s very hard to get out of.”

(my note: the future for all developed countries is Japan)

[1] https://www.bloomberg.com/news/articles/2020-01-17/japanific...

The alternative is extremely straightforward - ramp up public spending on infrastructure and social services and increase the minimum wage.

You can do this essentially without any inhibitions to growth until inflation hits about 7%.

Downside : it'll get a lot of very wealthy people seeing red and will scare upper middle classes who are more used to their security being provided by assets rather than social services.

Not quite as straightforward. Infrastructure comes with maintenance costs. These costs can tie you down in the next decades. But even worse, you literally cannot spend an arbitrary amount of money even for absolutely obvious ideas. Try to renovate or rebuild all schools in one state at once. Or create new bike lanes. You will soon see that there's only a limited amount of companies that actually can do what you want.

The one thing that seems to work surprisingly well is direct subsidies for switching to a better but more expensive product (electrical cars, house insulation).

Personally, I agree that the government should take negative interest rates as a sign to massively invest. But I struggle to find an investment that is both just and sustainable.

There is, for instance a huge pension gap in Germany. It would be wise to borrow money now if we could invest it to mitigate that gap. But how would such an investment look like? Buying children?

Renewables are one option for massive investments without massive long term costs. The important thing is to subsidize them upfront rather than subsidizing their income stream or you get high electricity prices.

However, the idea of stimulus makes basic assumptions that the economy can sustain a higher level. That economic article of faith may inherently be flawed in many cases.

Another option for developed countries is rather than trying to stimulate the economy instead focus on increasing efficiency. Japan’s workforce increased 1% in the last 22 years. Long term stagnation should be expected in countries like Japan with stagnant and aging populations. Even 1% growth assumes the economy will double every 70 years. Relative stagnation isn’t inherently bad as long as the economy is still doing all the things an economy should be doing.

> electrical cars, house insulation).

Those are very regressive, you’re taking money away from the less well-off (through higher fuel taxes, for example) and giving it pretty much directly to the way better-off middle-classes who can afford those new EVs and those houses which to insulate. It’s pretty much a return to the 1770s-1780s France, when “la gabelle” was in full force.

That's one of the main complaints I have about all those measures that are being taken currently to become green.

Government officials are also talking about using tax money to rebuild all houses for the people affected by the recent floods that were without flood insurance. It's a huge middle finger to all those people who can't afford a house.

There are so many tax exemptions that exclusively apply to the rather well-off that I'm surprised that these issues are not coming up regularly when talking about social issues.

Examples include offices at home are only deductable if they have a door (applies to larger-than-necessary apartments or houses), you get money for driving to work rather than living nearby and walking (0.35€/km), a more expensive hybrid company car costs the employee a lot less than a privately owned ICE car, and many more.

Please stop spreading misinformation. Yes, the classical "Arbeitszimmer" must be a separate room and, by the letter of the law, must have no private function. No, that does not apply for 2020-style home office. And no, you don't "get" 0.35€/km. You can deduct that amount from your income taxes. And that's totally in line with everything else you can deduct because you do it to earn the money in the first place.

Also, building a modest-sized house in Germany costs about 200k€ - this sum is affordable by the average German couple (average income is around 36k€ per year).

Germany is not California and especially not the Silicon Valley. Just because you may have chosen to rent an extremely expensive, 130 year old apartment 5min from your workplace that does not mean it is the lifestyle for the majority in the country.

Ha, 200,000€, you'd be lucky to get even land for that. Have you looked at housing prices recently? You can maybe get this in Saxony in a village somewhere where you need to drive 20km to the next supermarket or doctor. In my city you don't even get a 60m² apartment for that.

The Arbeitszimmerregelung is only valid for 2020 and 2021 and only up to 120 days/year. You typically work 220 days a year. In 2022 it's back to door-or-bust.

I live in a big city, I can walk to work and pay a relatively high rent for a small apartment, I can claim 0.35€ per day, about 77€/year. Meanwhile a friend of mine commutes over 50km, living in a big house. They are quite happy each year to get about 4,000€ back. It's government funded pollution.

Please don't tell me I spread misinformation when you yourself claim things that aren't true.

I wrote "building" a house, not buying the land. But if you need to know, I could recently have bought a 6000qm plot for about 100k€ about 1.5h by train from Berlin.

Also, again, your friends do not "get" anything. They pay way more than that for getting to work. They recover some of the financial burden of commuting, while you don't pay that in the first place and safe the time. Why should society help you in your insane quest to live in an ever denser environment, compete for square cm and minutes of time with literally hundreds of competitors while the countryside just rots away?

Your singular perspective about the big city life being the only true path is exactly what makes the city so expensive. If one day you cannot pay the rent anymore this has been partly because of this ideology. Don't complain when you have to move into some crappy apartment in nowhere when you retire and the young guns with 15times your income just pay ridiculous rents for your apartment.

> Also, building a modest-sized house in Germany costs about 200k€ - this sum is affordable by the average German couple (average income is around 36k€ per year).

This must be very modest and without any special necessities like a cellar. Current prices for a cold cellar alone are already 80k.

More realistic construction costs currently are rather between 300k and 400k - for a modest house. You'll only come down to 200k if you do lots of the work yourself.

Source: I'm currently trying to build a house and have gathered bids for weeks now.

I don't think so. First and foremost, house insulation can also be done when you rent out the apartments (but often the landlord has little incentive to do it). Second, electrical cars are expensive, yes, but they don't subsidize the well-off because they would have bought expensive gasoline cars otherwise. Who really profits from the subsidies is the middle class: You can lease small electric vehicles quite cheaply and if I am not completely mistaken, you can buy an electric Dacia for 10k€ after subsidies. So yes, this is not for the working poor. But the working poor hardly invest anyways, so it is really difficult to setup an incentive program for them.

One thing worth noting in this is that, at least in the US, a lot of the "infrastructure spending" that has been talked about recently is, in fact, maintenance.

We have roads, bridges, and buildings that were built decades ago, then the funds that should have gone for their maintenance spent on tax cuts instead, so they're limping along with stopgap solutions.

The US talks about infrastructure and then nothing happens because of political impasse on Capitol Hill. Biden is no Deng Xiaoping and the Democrats are no CCP.

Maybe it's time for radical political reform to end these deadlocks?


Germany is one example where a long-term infrastructure investment strategy makes a lot of sense as the infrastructure is crumbling: https://www.dw.com/en/german-infrastructure-begging-for-over.... Not all could be spent in a short time as you mention, but for economic recovery, long-term funding is probably better anyways.

To close the pension gap, Germany could also buy ETFs on borrowed money, or borrow to create a national investment fund, but that would be much too eccentric for an extremely risk-averse country.

> you literally cannot spend an arbitrary amount of money even for absolutely obvious ideas.

Is there a good way to measure what potential productive capacity of infrastructure investment is? I wonder what percentage of the limit we're at right now? Could the market efficiently react to a doubling or even 10x-ing of federal infrastructure investment?

I think there is: Count the applications for the infrastructure projects that you actually do. I doubt most companies can do more than one at a time. So if you have five applicants you can maybe do 3 projects in parallel before the price raises absurdly.

By this logic, shouldn't Europe be growing at much faster rates than the US? Their social services are more extensive, I believe the minimum wage is higher, and they spend more on infrastructure.

The EU imposes strict fiscal discipline. That basically prevents the possibility of taking advantage of Keynsian fiscal expansion. In other words, to the extent that greater spending causes growth, it's cancelled out by the matching taxes that reduce growth.


> Compliance with this rule is to be examined on the basis of reference values for the general government deficit (3%) and gross debt (60%) in relation to GDP, whereby a number of qualifications can be applied.

The simple key to understanding what can and cannot be done with printing money is to understand that you can redirect activity inside the country almost at will by printing, a pseudo command economy; but you can't print (a) foreign currency or (b) oil, steel, vaccines, or other constraints of physical production.

Worked example? If you print money and the citizens spend it on imported goods, that depreciates the currency and is usually Bad. Currency depreciation against hard currency (USD) usually shows up as inflation.

Weimar prints money to buy up domestic gold to ship to France for reparations => hyperinflation.

Zimbabwe prints money but is unable to subsidize kerosene in shops at any price because the country doesn't export enough value to import fossil fuels => hyperinflation.

US prints money for domestic stimulus while being oil producer and having labour slack and a generation of anti-wage-rise policy => almost nothing happens except asset inflation.

What in the US economy isn't inflated? The only thing I can think of in my life is utilities.

Everyone knows housing has gone way up. As I go about trying to do work on my house, it's very clear that the price of getting work done when you want it is not what it was in 2019, because I pay those same prices in order to be in a line. I haven't needed anything enough to figure out what the price of prompt work is.

Food prices have gone up. Cars have increased in price significantly.

> What in the US economy isn't inflated?

wages in many circumstance, though growth in low-skill labor wages from supply shortage we are seeing the same as other supply shock from corona.

> Their social services are more extensive, I believe the minimum wage is higher, and they spend more on infrastructure.

They have to spend on top of what they already do, because the current level is the baseline and is generally priced into market expectations.

As the original article is about Germany, in 2020 they had their first budget deficit in a decade:

* https://www.politico.eu/article/coronavirus-pushes-germany-t...

To put it bluntly: the Germans don't spend s--t.

Public spending in Germany is about the same as in the US, no deficit needed, because taxes are so damn high.


Germany tax burden on consumption is over 18% against less then 7% in America: https://www.chicagofed.org/publications/chicago-fed-letter/2...

A first deficit meaning Germany spend ordinarily all that and then also more. This is showing Germany spend significantely more for economy size.

Evidence is in need for supporting an idea that only spending above and beyond usual have an effect on markets.

This is not like-with-like. Spending on health should be lumped in with taxes to get a real picture.

Disagree, not all German health spending are in that figure. We have different social program as well that might cause change in figure, so such argument make any comparison meaningless.

Europe is a big place. There are huge variations in social services, minimum wages, and infrastructure spending. In general though building infrastructure is more expensive in the US.


I agree with this, but if you merely throw money at the economy without resolving supply chain issues, (which is the case we have now) - we get inflation. Because it's more money chasing after fewer (available) goods.

The previous US administration basically created supply chain problems with it's Hooverian trade policies. (ie. doing the same thing over and over and expecting different results. Nope. We got the same results we got in the late 1920's + COVID).

It's going to be hard to unwind that. I think the central bank has done a pretty good job making arguments that sustained low interest rates are a necessary evil. Unfortunately, the government (ie. aggregate of congress, senate, SCOTUS, and POTUS) are having a hard time swallowing that we need a looser fiscal policy. All because of political idiocy.

I feel like Keynes should be taught to all children in primary school.

You can leave out SCOTUS. They don't have much impact on fiscal or monetary policy.

They have the power to kill major initiatives; see e.g. how SCOTUS curtailed some of the New Deal programs (and how it took the extraordinary threat of court packing to stop them from going further).

I don't think it's as straightforward as you propose. Debt is itself deflationary and dampens growth. Public and private debt are already at global highs. Every dollar of debt is far less effective at stimulating the real economy than in decades past. Further, how much infrastructure spending would stay in a local economy without a significant manufacturing base?

I don't have the answers, but this seems to be borrowing from a playbook written for a different era.

Private debt is deflationary as people prioritize paying it off, reducing the velocity of money that would otherwise be spent.

The causality is reversed for public debt though - governments react to deflationary environments by increasing public spending to compensate for the private sector's propensity to save - as a "spender of last resort" as it were.

That's how Japan ended up the way it did.

Arguably it should have spent even more to offset deflation in the 90s.

>The causality is reversed for public debt though - governments react to deflationary environments by increasing public spending to compensate for the private sector's propensity to save - as a "spender of last resort" as it were.

Again, we're at levels record levels of global public debt. There is no free lunch. Debt financed spending is only possible through financial repression (real default through inflation in this case and in the 1940's following WWII, the last time US debt reached 130% of GDP) which ultimately drives speculation as capital searches for yield. Rinse repeat deflationary shock as a result.

All this speculation and capital going a little crazy searching for yield are side effects of an overabundance of capital.

We are seeing this now thanks to wealth inequality brought on by capital being given preferential tax status to labor for decades and stagnant wage growth again for decades.

This wasnt a problem following WW2 - wage growth was high and given vastly preferential tax treatment to labor.

>All this speculation and capital going a little crazy searching for yield are side effects of an overabundance of capital.

The stock market is where savers have been forced to. Pensions included. ZIRP/negative real rates have consequences. There "isn't too much capital". It's being misallocated due to misguided policy. It will get worse.

You need to start thinking in second and third order effects.

The data and financial instruments available to investors is a completely different universe than what they had in the 1940's. It's very unlikely that history will repeat itself.

Or if you really want the wealthy to see red, just deflate the damned asset bubbles. Cancel the underlying debts. Just null the whole damn thing. If you bet on real-estate prices or bank stocks or whatever rising 15% per annum when the economy was growing at 2.1% per annum, you eat the loss.

Do you like the idea of insolvent pension funds that suddenly lose their debt assets? Moral hazards from people who start taking on loans they cannot afford under the assumption that more cancellations will happen? Higher interest rates and more aggressive collections/foreclosure efforts from lenders that must now account for debt cancellation?

Canceling debt does not make wealthy "see red." Long-term it would harm those who initially benefit from the cancellation by leaving less credit to go around and forcing people at the lower end of the income scale to accept less favorable loans.

If you want to upset the wealthy, you can do any or all of the following:

1. End stock buybacks. These sound nice in theory but in practice they have promoted short-term thinking and have disproportionately benefited the wealthy.

2. Eliminate the long-term capital gains tax rates and treat all capital gains as income (perhaps with some provisions for retirement income).

3. Treat cash loans backed by financial assets (stocks, bonds, investment properties, etc.) as income (many wealthy people use loans backed by their investment portfolios to avoid paying income tax, and their heirs pay no capital gains tax because of cost-basis adjustments), with possible exceptions for loans that are immediately invested (to allow for leveraged investment strategies) and exceptions for mortgages that pay for a personal residence.

4. Eliminate the various industry-specific carve-outs introduced in e.g. the Tax Cuts and Jobs Act (which were nothing more than a corrupt way to buy votes from various senators).

and so forth. We have accumulated decades of policies that favor the wealthy, and as a result the income and wealth gaps have exploded.

If you want to upset the wealthy, institute a wealth tax (and redistribute as UBI).

If you want to decrease asset prices, tax them (without loopholes) and see their valuation drop real fast, or slow - depending on tax rate.

Just remember to equitably distribute a part of proceeds so you're helping, not hurting the poor.

I don't want anyone to see red, but this is probably the better path forward. OP's suggestion amounts to an official policy of stagflation, and that has huge drawbacks. If we let inflation run away eventually we're going to need another Volker to break its back.

How would you cancel the underlying debts and maintain any semblance of order?

Honestly? I'd just void them, nationalize any banks that go under, and give everyone who's actually using the underlying assets free-and-clear ownership. If you bought a house in the middle of a bubble in 2020, good job, you get a house and your mortgage is cancelled. The Sunk Cost Fallacy is a fallacy for a reason: there is always ultimately someone who pays for a speculative bubble out of their own use-values, and that's the someone who should be made whole, not the speculators.

And again, I don't mean to be inflammatory (well ok, I do), but I really feel that constantly reflating asset bubbles for the rest of time, rather than accepting a one-time severe penalty whose moral hazard applies only to people who need things for their use-value, really is a Sunk Cost Fallacy that amounts to throwing good money after bad.

The result would be an almost immediate spike in interest rates charged to whoever benefited most from the debt cancellation, as lenders would be forced to compensate for the risk of additional cancellations in the future. Worse still, it would create a massive moral hazard as (some) people start to take on loans they know they cannot afford long-term in anticipation of more debt forgiveness (this often happens after bail-out programs and is one of the major arguments for the "too big to fail is too big to exist" philosophy). Since retirees often live on income from loan interest (through pension funds or personal retirement accounts), much of the burden would be borne by retirees and many of them would be forced back into the labor force (crowding out the younger generations who are trying to find their first job; see e.g. Japan for a manifestation of this problem).

Debt forgiveness is not nearly as simple and positive as people believe. It often winds up hurting the people it was meant to help and having long-term negative consequences.

I'm down, I have a few properties. No mortgage and inflationary rent means I wouldn't have to work anymore

I mean, I'd be fine with screwing homeowners too, and I am a homeowner. The Zillow estimate of how much I could charge in rent is several times over my mortgage and HOA payments. The estimate for how much I could sell for is $25k over what I paid, two years ago. You can't tell me my house is making $12.5k/year for literally nothing, while I live in it and repairs accumulate, and tell me that's a sensible way to run an economy.

also, the rising real estate prices have detrimental second and third order effects.

For instance, birth rates are dropping because young adults cannot afford a house, which in term means they have to rent against higher prices which means they have less income to actually put into the economy.

What will we do once we have a generation which doesn't have any wealth and doesn't own a place to live? People who have little to show for it after a lifetime of working while subsidizing those who own the properties they live in is not a situation you want society to be in.

Don't forget that those young people have parents and will eventually inherit their real estate, so they will have something to show for it after a lifetime of working.

Maybe. Remember that the house can be:

1. Split multiple ways due to multiple children. 2. Sold to finance retirement living.

Only some of them. And many of those houses will be sold to pay for healthcare.

Low interest rates and high inflation will pump those numbers up even more. I don't see a way to stop the increase without the debt imploding on itself which the government would never let happen (I'm personally in favor)

Cancelling debts will only make asset prices skyrocket. Why worry about paying $400k, $600k, or $1 million for a house, if you anticipate that a few years from now the govt will wipe away all your debt?

I just bought a few rental properties hoping this comes true. Lock in 2% mortgage for 30 years while inflation ramps up to 7% is free money. Open up the border and I might not have to work any more

Yeah once one realizes that yields are directly influenced by supply and demand, then that is the right conclusion. Political irrationality and specific interests are what’s holding us down. It is said that one day, if the CCP has to choose between relaxing power or scarifying economic growth, they would sacrifice economic growth without blinking. The same can be said about the 1% in western countries.

I agree with increasing minimum wages and creating robust social services (universal healthcare, mental health support, the elimination of homelessness and enough food support no one goes hungry) in order to set a really solid floor for all. With regards to infrastructure, we have to be exceptionally mindful to not build for a future that doesn't use or need infrastructure that has a lifetime measured in decades (or, wishfully thinking, 100+ years). To see the peril, witness the rapid decline in need for commercial real estate with the very speedy transition to remote work, real estate which is very expensive to convert to other purposes. We don't want to be building "bridges to nowhere." for the sake of economic activity.

> Downside : it'll get a lot of very wealthy people seeing red and will scare upper middle classes who are more used to their security being provided by assets rather than social services.

Change is hard, but inevitable.

> witness the rapid decline in need for commercial real estate with the very speedy transition to remote work

Is this actually happening? Feels like a tech only phenomenon, and tech workers are only a small slice of the US office labour force...

Oh I didn't know this, hmm. Thanks for showing me it

If you treat infrastructure as a special kind of investment that requires a guaranteed return you will likely end up with shitty infrastructure.

I'm not suggesting traditional financial return on infrastructure, but genuine demonstrated need and use regardless of return. If you build an unprofitable but highly utilized HVDC transmission line to avoid CO2 emissions for somewhere than can't generate their own clean energy (ie the Faroe Islands, for example, which hovers constantly at ~40MW of electrical generation using oil with occasional reliance on pumped storage), that would be a win imho. Japan's rail infrastructure is another prime example (although profitable if I recall). Avoid boondoggles, avoid status seeking projects, avoid nepotism and corruption, but deliver value.

Edit: As someone else in thread pointed out, renewables should be invested in.

> The alternative is extremely straightforward - ramp up public spending on infrastructure

Hang on. Isn't that essentially what the Japanese did?

I wonder which domestic investments turned out to be the smart move in Japan.

I have spent 2 years studying economics learning about Arrow-Debreu theorem, Hausman test and so on, and I still don’t understand why can’t Japan just print money and give them to people if they want 2% inflation.

> […] and I still don’t understand why can’t Japan just print money and give them to people if they want 2% inflation.

Political will.

This is not a 'technical' issue, but a social/behavioural one.

They are already at 266% of public debt to GDP, so they have been aggressively doing exactly that.

just a random thought....wouldn't this also increase equality? I essentially devalues the currency by increasing supply, but distributing the supply evenly across the population. Maybe that's a problem for the rich and influential, although that sound too much like a conspiracy.

Rich people don't hold much of their wealth in cash and would hold even less if such policy were in place. You would just inflate asset prices (what rich people hold) and dilute cash (what poorer/less educated people hold).

If you give everyone a million dollars and it doesn't mean everyone can now afford a house in a sunny state. It just means houses will be more expensive as no one is going to give them away for worthless cash.

The way housing supply seems to be a major driver here, has me pretty well convinced that the only way out of this, eventually, is a stable population growth. (ie. restrictions on reproduction). (Not like China - but this implies apocalyptic levels of resistance from groups that traditionally don't like people being able to choose their reproductive habits).

Some people like being able to choose their reproductive habits, and like being able to choose differently than you think they should. You're right that you should expect apocalyptic levels of resistance from them, though.

> Rich people don't hold much of their wealth in cash and would hold even less if such policy were in place. You would just inflate asset prices (what rich people hold) and dilute cash (what poorer/less educated people hold).

Please explain how this works. If I buy stocks then the money goes to the seller of the stock. Most of the time that is another rich person because rich people own a lot of stocks. Then it's companies issuing new shares and finally it's some retail investor owning an irrelevant fraction of a company.

So, how do I as the class of rich people protect myself against inflation/negative interest rates/wealth tax on money? I can't.

Rich person -> Rich person is net zero.

Rich person -> company is net zero because I own the company and thereby own the money it has in its bank account. Worse, if that company employs people the peasants get my money.

Rich person -> retail investor. I lose every time.

If anything, rich people massively benefit from 0% inflation or even deflation. As a millionaire you can afford to throw $100k into Bitcoin and get another million out of it with zero work done, meanwhile those stupid stocks have to employ peasants and pay them.

Here is another paradox: If the rich have very little money and the poor have most of it, why are they poor?

Cash is just means to provide liquidity when trading assets for assets. When someone sells stocks it's almost always to quickly spend it on something else.

I am not rich but quite well off. What has recent policy of pumping cash as loans and handouts done to me? My assets (mainly stocks) skyrocketed. My less fortunate friends complaining that prices of everyday items has gone up? I haven't noticed, I can buy more fresh produce or housing or electronics with my Google or Amazon stock that I could have before the pandemics and way way more than a few years ago.

It seems to me you're confusing money with wealth. Money doesn't matter, assets do. It's just convenient to price assets in money as long as the currency is stable. If you give everyone a house you solve a huge problem. If you give everyone a freshly printed million dollars you don't solve anything. Rich people still live in big houses and own companies. It will just be a temporary inconvenience to find some way to trade. No one is buying anything of value with that million.

> If the rich have very little money and the poor have most of it, why are they poor?

There are a lot more poor people than there are rich people. Collectively they have most of the cash, but no one individual has very much. More importantly, though, one's wealth is not dictated by the amount of cash one owns. If you're rich and in need of cash you have plenty of assets you can trade for it. If you're poor then cash makes up a larger portion of your assets, and the part that isn't cash (your home, car, etc.) is both non-liquid and painful to part with.

The first bit, incidentally, is part of the reason why redistribution doesn't help: there are a lot fewer rich than there are poor, and even if you seized all the assets of the rich and spread them around it wouldn't add up to much on an individual basis. (And then secondary effects kick in: production capacity collapses due to consuming capital, prices skyrocket, etc.) And then you have the fact that the rich end up rich as a result of various combinations of preferences, habits, and connections which distinguish them from the general population—not merely their bank accounts—and since those underlying factors shaping the flow of wealth aren't likely to change you'll soon end up back where you started.

Because they need people to work in cheap restaurants (etc.)

Btw, the point with 2% inflation is rising wages which then causes rising prices.

Furthermore, prices of much stuff is held down by productivity (hours per widget).

Japanese Boomers don't want their savings to lose its value.

Japan is still one of the safest and politically the stablest places to live on this godforsaken planet. These economists however try to convince us it's Mad Max.

Total fertility for Japan as a whole is 1.4; in Tokyo it's 1.09. There is very limited immigration.

That's not stable.

What's not stable about your population safely and comfortably declining over decades? Low crime and low unrest seems like metrics worth optimizing for. If increased immigration were to increase those metrics, what is the value? Economic growth that has proven unnecessary?

> Japan is still one of the safest and politically the stablest places to live on this godforsaken planet.

Unfortunately, racism in Japan is rampant.

If racism wasn't a problem, then immigration wouldn't be seen as a problem either.

The real problem will be: when the rest of the "undeveloped world" becomes developed, and the need to migrate is relieved. Then we're ALL "Japan" economies. Oh wait, I don't see a problem with that.

Japan is also in a very interesting situation where their public debt is 266% of GDP with no end in sight of the debt-financed spending. And yet, there is still no inflation. Can they spend forever? Can the central bank just write off the debt without anyone taking notice? It will likely be prophetic for the West either way.

No, the central bank can't just write off the debt, because that's so many peoples' retirement. The government has been able to create that much debt without causing too many other problems because people keep investing their money in the debt.

No, the Bank of Japan holds almost half of the debt, not just retirees. A write off has been suggested in the past:


Though there are similarities, the US and Japan have very different circumstances. The US runs twin deficits, has extreme inequality compared to its peers, and extremely high costs for healthcare and education. This is not a recipe for stability.

I wouldn't be so sure that EU and US will follow the Japanese scenario. In many regards Japan is a special case. On this subject I recommend reading Lyn Alden [0] and Princes of the Yen [1].

[0]: https://www.lynalden.com/economic-japanification/

[1]: https://www.amazon.com/Princes-Yen-Central-Bankers-Transform...

Exactly what qualifications does Alden have?

> high saving-low investment environment

How can such an environment be so stable? If people put their savings into a bank account, then this savings would nevertheless be available for investments via the banks, arn't they?

> If people put their savings into a bank account, then this savings would nevertheless be available for investments via the banks, arn't they?

No, those two things have nothing to do with each other. When you ask a bank for credit to invest into something, the bank just creates money they don't take money from other customers.

The amount of deposits puts an upper bound on the amount of loans due to the 10% reserve requirement, but otherwise yes.

>(my note: the future for all developed countries is Japan)

Would it be fair to say simply, “eternal growth is not sustainable”?

Can we get out of the growth-focused finance system and use some other metric such as “well-being”?

> inflation

Inflation is the only good thing in this. It's finally close to Euroarea target. Unfortunately it wild likely slow down within a 12 - 18 months again.

An interesting read is https://www.frbsf.org/economic-research/files/wp2016-05.pdf

What's often missed in this analysis is population. Interest rates are tightly coupled to population growth and even with negative interest rates, a country needs to see Japan-scale population decline to risk Japanification.

The virus has accelerated EU population decline and exacerbated the North/South fertility divide. It's natural to think that as the long-term outlook for the virus worsens (over the next several years), this would have a non-negligible effect on interest rates. https://www.reuters.com/article/us-health-coronavirus-eu-bir...

Why is the virus going to worsen? Are Europeans more resistant to the vaccine? Death rates in America are almost entirely the unvaccinated by now

Actually, total deaths from all causes (among vaccinated and unvaccinated taken together) have been back to near-normal levels since March.


The claim was "death rates in America are almost entirely the unvaccinated by now", which is correct. And cases are going up. Excess mortality, in the past few months no less, is completely irrelevant, not only in scope of time but also to the statement being made.

I'm a bit of a layman when it comes to financial stuff like this. Is there any place I can go to really understand what this headline actually means and what the implications are?

In simple words, this means you lend me 100 bucks, and you agree that I will pay you much, much later...And only 90 bucks.

Why should I do this?

I own a hedge fund. I believe my algorithm will crush the market and return me a 20% annual yield. However... maybe it'll give me a -50% yield one year. I need a suite of zero-risk investments. A negative interest rate sounds insane, but I can't easily hold on to a billion in cash, I'm not a bank! Where am I going to put it, I can't trust Wells Fargo, my mattress is too small, Buster burned down the banana stand! Sometimes breaking even-ish is best for hedging risk.

Individuals: Your mattress is not big enough for all your cash and your neighbors are eyeing it too...

Institutions: requirements that they hold a % of their portfolio in safe assets like bonds.

The price of anything is what two people agree upon, right? So if you pay me 10 dollars to get 9 dollars in 30 years, that means we're betting against eachother: you think the economy is going to tank and only losing 1 dollar will be a good deal, which is of course why these bond prices worry people, because in any normal situation you'd expect some positive return on your investment, not just a small loss.

Because the government provides the strongest guarantee of that money being there in the future. Banks can go bust or your money can get embezzled and so on.

In particular for larger amounts of money. Many countries have deposit guarantees for smaller amounts, so for most individuals it wouldn't make any sense to buy negative-interest bonds. For example, someone in the U.S. who wants to store $250k with a government guarantee can simply put it in an FDIC-insured bank account. I believe Germany is similar, though with a lower €100k guarantee per account. You can go a little higher by having multiple accounts at different banks (at least for FDIC insurance, the first $250k at each separate bank is covered). But if you have $10m or $100m to store, government bonds become the only practical way to get a similar level of insurance.

Because you might be running a central bank that's yield insensitive and has literally unlimited buying power. If that's not you, there's not much point.

Well it is very odd that you should want to do this, which is why it is notable. It means something odd is happening in the bond market. What, is up for debate.

And the implication is that bond markets don't expect our current inflation to last very long and that growth will also likely be below par for a long time.

Who is buying these bonds with negative returns?

> the European Central Bank’s statement that it had bought many more bonds in the last two months than the bloc’s top four countries sold.


I am curious if we're entering a period where western governments must run deficits and central banks must purchase said debt at sub zero interest rates to keep the economy running.

In principal this could occur if there were large capital “sinks” in the economy where paper money is being removed from circulation or it's velocity plummets. This could occur if for instance certain economic actors could acquire large cash flows that they then deposit into illiquid non productive assets.

E.g. Housing, universities, Large rent speaking corporations with offshore accounts, individuals with the same.

As someone living in Europe, I’m really not sure how to financially insulate myself anymore. It’s not clear which asset class is safest to protect against inflation or a large negative economic event

Own your home, keep a small emergency savings account (~10k EUR), invest outside the bloc (VT, VTI, VEMAX). You've got robust social safety nets, any returns are gravy. Some currency risk is unavoidable.

(educational purposes only, not investing advice, pay a pro a fixed fee for an hour or two of time)

> You've got robust social safety nets

Depends which EU country he is living in (though he said Europe). Italy pension system is hazardous. Greece is in the EU too, by the way.

Asking because I don't know: what are the odds Germany and France by way of Brussels bail those folks out?

Germany will never run an trade deficit out of a stupid sense of pride, it's completely irrational, so 99%.

Just think about it. If Greece needs x billion € to pay its debt off the most logical way to deal with the problem would be to just buy a huge amount of Greek products rather than send x billion € directly.

My guess is, they'll help it like they did with Greece (maybe a bit more generous) but they'll have to pay a big part of the bill (ie: austerity)

But if the asset bubble bursts and your home loses most worth.

>But if the asset bubble bursts and your home loses most worth.

Luckily the primary function of a home is to provide shelter. You don't have to worry about being out on the street if you're unemployed (pending you can afford local taxes).

Sibling comment gets it: regardless of everything else, you must "consume" housing, either as a capital good or in rent. Home ownership insulates you from shocks to the rental market.

It's possible that the house price falls by 10%. It is very, very unlikely that rents will crash by 10%; they're sticky, at best you'll see a very slow slide over years.

Yes, you must consume housing. But if you can't pay off your mortgage in a reasonable time frame (10-15 years), "owning" it doesn't give you any security, at least against sudden job loss. If house prices crash and you lose your job, you might be kicked out of your rented apartment, but that's it. At least here in Germany, if you were in the same situation as home owner, you'd lose your house and have to pay back the debt resulting from the lower house prices (unless you file for bankruptcy).

> But if you can't pay off your mortgage in a reasonable time frame (10-15 years), "owning" it doesn't give you any security, at least against sudden job loss.

If you're still paying your mortgage, do you really own your home?

> If you're still paying your mortgage, do you really own your home?

You own your home in this scenario just as much as the entity on the other side of the equation owns the income stream from your mortgage.

A mortgage is a collateralized loan. You agree to give up ownership of your collateral if you fail to meet the terms of you contract. So yes, you own the home now, subject to constraints.

Ownership is almost always subject to some constraints. Nobody says “do you own your home even though you can be taken out of it (and jailed) if you refuse to pay taxes on it?” even though that’s arguably a more extreme condition upon your ownership. While I am sympathetic to conversation about the broader meaning of ownership, this “mortgage => !ownership” thing is a tired meme.

You're right the bank owns your life, your ability to create value. What a terrible place to be in

> Own your home

Easier said than done.

If you don't own your home, that is a far higher priority than trying to protect a comparatively tiny sum of savings from inflation hitting the dangerous heights of 5%.

Far more important is keeping your salary up with inflation, since for most people 1y salary > savings.

Yes, you have to switch jobs frequently to get those inflation adjusted raises.

> keep a small emergency savings account (~10k EUR)

Hopefully you don't mean in a bank? If history is any guide that's useless with capital controls initiated before the public even gets whiff of it, see Greece and Cyprus 2008. A bolted-down safe in your house seems to be the caveat on such a statement. Money in the bank simply isn't yours and far too many people don't realise this.

At least in the UK you are insured up to 80k, so keeping 10k in a bank is perfectly safe. You will not lose it if the bank crashes.

That advice you're giving there is actually kind of dangerous & misleading.

I don't like these kind of "insurances". It is very probable that when multiple banks go belly-up this could lead to serious inflation. You will get your money back in nominal terms, but what will you be able to buy from it? I even think that we should somehow count these "insurance" to the central bank balance sheet. If shit hits the fan the cb will sure as hell monetise the government debt needed to guarantee these amounts.

A small emergency savings account isn't there to insulate you against a sovereign debt crisis. It's there to insulate you if you lose your job and need a few months to pay your mortgage while you find a new one.

Most of Europe has enough unemployment benefits to get you by for more than a few months, though, sometimes years. It better stay invested.

The Cyprus confiscation had a threshold which was much higher than your hypothetical 10k.

It's still wise to at least consider the possibility of a bank failure, qv Northern Rock.

Grandparent comment's advice about keeping an overseas investment is wise, too; as a Brit I've not regretted having US investments.

> It's still wise to at least consider the possibility of a bank failure, qv Northern Rock.

Most industrialized countries have insurance of bank deposits up to a certain point. So even if the bank goes poof your savings are still safe.

It would simply be prudent to have money in more than one bank (or credit union), as if something bad happens then things may get chaotic in the short term.

A second account also helps with IT problems:

* https://en.wikipedia.org/wiki/2012_RBS_Group_computer_system...

* https://www.theguardian.com/business/2019/aug/27/natwest-and...

If you're paranoid or live in a country where your risk tolerance dictates such a course of action, sure, keep notes on hand.

> It’s not clear which asset class is safest to protect against inflation […]

The Rational Reminder podcast looking into this and basically concluded that there is no hedge:

* https://rationalreminder.ca/podcast/150

* https://www.youtube.com/watch?v=_f0dns9fHFs

The best you can probably do is have some debt which will worth less and less over time as its nominal value stays the same whereas you get cost of living (CoL) increases with your salary so have more money in really terms to pay it off.

Other than that equities have (generally, but not always) had good enough nominal returns so that you get a real return increase in your investments.

Where did we end up if shorting your currency is the only way to go? I could not sleep well with the potentially unbounded loss

You short the USD by borrowing in USD, spending USD while it is still valuable and then wait for it to devalue. Deflation is a bad thing so the Fed won't let it happen.

Of course the flaw with this is that I get 4% interest on personal loans so I actually can't make money off of this strategy.

Gold. Gold essentially functions as a short on paper currency. If you're wrong, you'll lose money, but it won't be an unbounded loss.

Gold isn't as much of a hedge as most people think. Two papers by Erb & Harvey cited in the podcast:

* https://www.nber.org/papers/w18706

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2639284

Virtually any asset thats not cash should do given that the response to any negative economic event is going to be fiscal and monetary stimulus.

For inflation, you probably want to diversify broadly among productive assets.

For insurance against negative economic events... that's a more rapidly evolving, short-term issue. To the extent you can do it, it is a matter of identifying near term risk sectors, and minimizing exposure to the and/or having investments in areas negatively correlated with the at risk sector.

Chocolate, Cheese and Wine.

I'd go with an ACWI ETF, if you want returns. Gold is also an option, I suppose, if you want to hedge against the economy and don't really need any returns.

I believe you should have some crypto (some percentage of your net worth). At the very least Bitcoin, maybe also a bit of Ethereum.

> I am curious if we're entering a period where western governments must run deficits and central banks must purchase said debt at sub zero interest rates to keep the economy running.

I think that as long as the EU wants to keep the political Euro project going, there is no way around such policies, since having rates go up could cause Southern European countries to default and would cause the EU to implode.

Cash spent on housing, universities etc doesn’t “sink into a hole and disappear”. Someone else on the other side of the transaction got it and can spend it. On the other hand, raising taxes to collect said cash to neutralize the debt would be a “sink”.

Its silly how many otherwise smart people forget that income = expenditure. Whatever you spend is someone elses income. That money doesn't get incinerated.

Sounds about right. There seems to be little political will to actually "euthanize the rentier", or even put a cap on how much income rent-seekers can accrue nonproductively. The result is that "landlords are eating everything."


Do you remember that MMT thing? That thing that says the government can create as much money as it needs and if there is inflation (doesn't matter if CPI or not) then you tax the part of the economy where inflation happens to return the money.

A wealth tax on deposits and land would be ok. The rich can buy bonds or stocks if they want. If there is a shortage of companies you can always create new ones. If there is a shortage of money or land it's much harder.

If you buy a house, that money isn't in a sink. It goes to the person that sold it to you. And they spend it on something else.

Similar situation for "illiquid nonproductive assets". Whoever sells them gets the cash.

If it sits in a bank account, the bank loans it out, where the borrowers spend it again.

Bezos isn't keeping $200 billion out of circulation. He owns 10% of a $2 trillion company.

Modern monetary theory, baby! We'll see if it collapses, but I guess it'll be fun to see it in action.

If I remember correctly, the bonds may only be sold by the government to a fixed list of banks and those banks can then sell them to the ECB or the general public.

The level of indirection serves no practical purpose but is ideologically justified with the argument that banks are more likely to consider the market when deciding whether to buy the bonds or not even though they can just sell to the ECB without any losses.

Swiss central bank bonds are negative for decades and seem to be popular still. If you're scared of a crisis I bet you're interested too.

Globally diversified bond funds do. Such as the etf vgro.to

I don’t understand the benefit of an individual buying such a bond when not forced to. Holding cash seems better than unless you think rates will go even more negative!

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