Tuesday, July 30, 2013

"The Biggest Government Bond Bubble in History" [UPDATED]

 So Andrew Haldane, a top official at the Bank of England, declared in June of his own institution, as quoted in "The Near-Zero Interest Rate Trap", an opinion piece in today's WSJ,  written by Robert I. McKinnon, a professor at Stanford University and a senior fellow at the Stanford Institute for Economic Policy Research.  Professor McKinnon writes that the bubble is not limited to the Bank of England:

The Federal Reserve, the Bank of England, the Bank of Japan, and European Central Bank all have used quantitative easing to force down their long-term interest rates. The result is that major industrial economies have all dramatically increased the market value of government and other long-term bonds held by their banks and other financial institutions. Now each central bank fears long-term rates rising to normal levels, because their nation's commercial banks would suffer big capital losses—in short, they would "de-capitalize."
With less capital, we would have banks reducing lending even further, and there we go again: staring at deflation.  Meanwhile, the stock market struggles upward, because investors and savers, rejecting those bonds already, have nowhere else to go.  What are the investors and savers to do, then, bury their cash in the back yard, buy gold?  The market rules, and it will finally make its will effective, whether the politico-bankers are in Washington, D.C. or some other first-world capital.

As to the stock-market, which had a "Great July" this year, one has to view its return in a 15 or 20 year perspective and, then, discount its rise by the inflation that has occurred during that period.  Furthermore, with respect to a tax-paying investor, one has to further reduce those returns by the income tax that the taxpayer must pay on that investor's returns.

No comments: