Wednesday, September 11, 2019

Financial communism

Is the current ultra low or even negative interest rates on sovereign debt something weird? 

Of course not: a) take away all central banks purchases of public debt with QEs, which helped to keep the saving glut intact or even increase it; b) get rid of regulations that assign the lowest risk weights and thereby the lowest capital requirements for banks to the borrowings of the sovereign monarch; c) take away liquidity requirements that have banks buying sovereign debt; d) stop making pension funds and insurers having to buy “safe” government debt irrespective of the price; and e) stop central banks from paying negative returns… and you would not see public debt bought and sold at ultra-low, much less negative rates.

What we are really suffering from is a well-disguised and utterly creative and non-transparent financial statism of monstrous proportions, which impedes the markets to signal what the undistorted interest rate on sovereign debts should be. 

The difference between the interest rates sovereigns would have to pay on their debts in absence of all above mentioned favors, and the current ultra-low or even negative interests they pay is, de facto, a well camouflaged tax, retained before the holders of those debts could earn it.

And, if ignoring the risk of inflation, one could argue sovereign debts issued in their own domestic/printable fiat currency is safer, and should therefore have lower capital requirements, but, the other side of that coin, is that it really implies that government bureaucrats would know better what to do with bank credit they're not personally responsible for, than for instance private entrepreneurs who sign their own name on bank loans to them.

So if we consider the non-transparent regulatory subsidies for sovereign debt, and the effects of central banks purchasing so much of it, as we should, the already so scary fiscal deficits are even larger than reported

I have the nagging feeling that the market value of sovereign debt much more accurately represents the real debt burden faced by those sovereigns than the par value of it. And that that market value  could currently be a scary number in relation to GDP.

And then so many shamelessly blame our difficulties on the usual scapegoat… neoliberalism

PS. 2004, in a letter published in the Financial Times I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage, they are doing by favoring so much bank lending to the public sector.