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09/23/2011      share:derubg

The coming burst of the bond bubble

This text was excerpted from: This is going to hurt, Allister Heath, Spectator, 2011

There is much to be terrified about in today’s global economy. The eurozone’s death dance, China’s slowdown and America’s inability to create jobs are enough to make the most upbeat investors gloomy. But even these problems pale in comparison with the biggest threat, one with implications so hideous that financiers are reluctant to talk about it even now.

Crucially, in many cases, the interest rate for government bonds is less than the expected inflation rate. So the ‘real terms’ interest rate at which governments borrow is actually negative. Lending anyone money at zero interest is weird enough. But the bond bubble now means that many governments can be loaned money — and, in effect, be paid for the privilege.

This is crazy. It shows that the bond markets are well and truly in major bubble territory, their valuations as absurd as the rocketing subprime properties of yore. And, just like last time, hardly anyone is sounding the alarm.

The bond bubble not only helped cause the boom and subsequent crash. It then helped western governments deal with their hangover by serving another round of debt. It is extraordinary that most western countries are responding to the debt crisis by doubling their national debt. And if this pipeline of cheap debt dries up, what then?

The thing about bubbles is that you never know when they will burst. But already there are signs of strain. The governor of China’s central bank recently declared that its reserves ‘exceed reasonable requirements’ — a nod to the fact that Brazil, China, Russia and India are facing pressure to spend the cash on development at home.

After the last crash, the Queen visited the London School of Economics and asked a killer question: ‘Why did no one see it coming? ’ The answer is the same reason that no one now talks about the bond bubble: mankind is hubristic. There is a huge willingness to believe that artificial prosperity, caused by excessively cheap credit, is actually real.

This is going to hurtAllister HeathSpectator09/17/2011
These follow-up articles used this article as a reference:
Euro-bailout fund buys its own debt11/16/2011
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