De l’argent pour du vent

Apr 10, 2015 Daniel Gros

BRUXELLES – Le monde développé semble se diriger vers un taux d’intérêt nul à long terme. Même si les autorités monétaires des États-Unis, du Royaume-Uni, du Japon, et de la zone euro ont maintenu les taux directeurs à zéro depuis déjà plusieurs années, la perception que cette anomalie était provisoire se traduisait par des taux à moyen et long terme élevés. Tout cela risque pourtant de changer, surtout dans la zone euro.

Techniquement, les taux nuls n’ont été observés que pour les taux nominaux de la dette à moyen terme perçue comme dénuée de risque. Or, dans toute la zone euro, les taux sont presque nuls – même négatifs pour une portion non négligeable de la dette publique – et devraient demeurer bas pour un certain temps.

En Allemagne, par exemple, les taux d’intérêt seront négatifs sur les titres souverains à échéance de cinq ans ou moins et très légèrement positifs pour les échéances plus longues, ce qui donne une moyenne pondérée de zéro. De toute évidence, le cadre monétaire à taux d’intérêt presque nul n’est plus l’apanage du Japon.

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0 Comments on this paragraph, 16 Comments on this article

jagjeet sinha Apr 27, 2015

Asset Values can be rebuilt with Zero priced Debt to Infinity.
Like the first time Zero entered the European lexicon, Infinite growth was the result. Zero priced debt removes Bank deposits as an Investment Asset Class - replaced by Equity release drawdowns and Rental yields.
Indeed the Zero leads again to a Brave New World.
Incentives for all to use the Zero to build their Asset Values.
Inducement for Public Investments to be funded infinitely.
With Perpetual Zero Debt - Infinite liquidity.
May The Zero continue to bless all !
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Procyon Mukherjee Apr 13, 2015

'Debt is good' hypothesis is rejected and the alternate hypothesis is 'debt for real investment that creates jobs'. Unfortunately even at the lowest interest rates, the investment climate hardly saw a great change as opportunities were found to be much in want while uncertainties about the future loomed large. Also there is still so much of supply around commodities that the inventories, which at some time made a great trading sense has become risky bets. The prices show where the demand is. So what is it about taking more debt for?

In fact the question should shift to what to do with more debt, one cannot produce something which is lying unsold for some time? The more we do this the more we are drawing from the future, the interest rate itself does not count.
- Rajendran Vasudevan Apr 24, 2015
  
  Hello Procyon & John.
  
  Tons of money being already committed to commodities and having very few opportunities for further deployment of fund need not be the only indicator for assessing fund uses in a low interest rate global environment. The issues need to be looked at from multiple perspectives. Over the last several years it has been the case that after exhausting all the private investments and the public investments , globally, there has been a positive difference between saving and investment each year. This is not exactly a nice situation. And obviously the solution lies in the equation set above: public investment and private investment opportunities. The whole world should come in to the picture in this context, not just US, Europe or Japan. Private investment in these three places are now very low by historical standards since relative profitability in conventional routes such as industrials, consumer products, and so on is paltry. Demand generation in novel areas is the only way out. When profitability is unattractive, investments dont happen in private projects, period. Thus for these three, opportunities in government investment is the only way out to begin with. Honestly there are hundreds of ways in which this can be probed and opportunities identified and actioned. Developing and frontiers markets is the other side. The opportunities to invest here is huge. Innovative ways to seek out solutions for the dire conditions such as issues of high unemployment should lead to satisfactory results here. What is needed first and foremost is a changed way of looking at things. As for the size of the debt a country can take, where do we set guide lines? A governments's current source and use of the budget is the starting point. We all do know that Greece wont be able to pay back its loan and at the same time we are more confident about China being able to pay its loans. The single most important driver is the GDP growth rate. That apart, how does one still decide how much is too much. Micro treatment could be a good analogy. A chief financial officer in a company who is confident of a steady cash flow will not try to get a AAA credit rating for this company. In order to get a high rating the above CFO has to keep his debt low. He wants to benefit from his steady stream of future cash flows and there by increases his debt level to the extent that he gets an investment grade: some thing like BBB++. Specific benefits of debt in a corporate environment wont find parallels in a sovereign government. however if there is a level of certainty about the outcome of an investment made by the government in a a huge infrastructure project -for instance, and if it requires a debt to GDP ratio of 120% so be it.
  A new reply to this comment has been posted.
- John Brian Shannon Apr 14, 2015
  
  Hi Procyon,
  
  Borrowing money to stimulate the economy (in the U.S.A.) does work.
  
  When you major in economics in the United States, one of the first things that you learn is that for each million dollars of stimulus added to the economy, there is a payback time of 15 years.
  
  That was back in the late 1980's. Now the payback time is 11 years.
  
  It is theoretically possible that payback time could be as low as 7 years in the U.S.A. if a 'perfect storm' of constantly moving variables were to align.
  
  How is it paid back?
  
  In many ways, directly through taxation.
  Indirectly where formerly unemployed people receiving unemployment insurance, became employed as a result of said stimulus and thereby paid much more tax.
  Indirectly, via increase use of government services with fees.
  Investment spending by stimulus employed individuals and consequent taxation.
  More purchases of durable goods.
  Dramatic upswing in the velocity of money.
  More disposable income en masse, has a positive effect on the overall economy.
  And in many other ways.
  
  This might not work in all economies. But it works well and is utterly predictable in the U.S.A.
  
  There is a point when interest rates are high, that stimulus does not work -- as the interest payments on the massive mountain of debt carried by the U.S. could drown any gains made by the stimulus.
  
  Which is why I always natter away at the government to keep debt-to-GDP at 50% or less -- in order to have room to maneuver in order to stimulate the economy early and massively, in bad times.
  
  But they never pay down the debt when times are good, as Keynes suggested! (OK, Bill Clinton did and so did Ike Eisenhower, but that's it!)
  
  Keeping our D2GDP at something less than 50%, helps to keep interest rates low, allows room to borrow massively to stimulate in bad times, and allows the highest possible credit rating even after borrowing billions to stimulate the economy.
  
  I always appreciate your excellent comments here at ProSyn.
  
  Cheers, JBS
  A new reply to this comment has been posted.
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Erikwim During Apr 13, 2015

The article shows it is very easy to get entangled in real versus nominal reasoning. Daniel first correctly points out real rates in Japan were positive even with near zero nominal rates. But then he wrongly concludes Greek debt at 175%/GDP is manageable for carrying near-zero nominal rates. With Greek deflation, real rates are positive in Greece and unlike Japan Greece cannot print more euro's to buy it's own government debt, as Japan does.

Similarly the roll-over issue suffers from nominal/real delusion. Governments have no problem rolling over government debt at 10% nominal interest rates if inflation is also 10%. leading to a 0% real rate and a stable debt/GDP ratio.
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Luca Grande Apr 13, 2015

It's amazing how a perpetual-debt-inflated-growth mentality is taking hold among so called economists and governments. This will work for a while, until we realize we are all living a Ponzi scheme game where all the benefits go to the top earners and the middle class will be wiped out by believers of monetary autocracy.
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Todd Clay Apr 13, 2015

This same 0% interest rate is causing the rich to become even richer. The borrow at near zero rates and put their money into the stock market which has been going up with hyper-inflation. They won't all lose it at the top but some will. It's a game that most people are not playing this time as the individual investor got burnt so bad last time there's no volume in the market at all.
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Gary Palmero Apr 12, 2015

One reason German interest rates are so low is that it may be a stealth hedge on the part of some European investors on the possibility of the impairment of the Euro. Long Deutschland sovereign bonds are the closest proxies to the old D-Mark. Whether this strategy is an efficient one is for the market to decide . Some European investors, by their respective charters, may have to invest in European sovereign debt and are concerned about default of one sort or another over the intermediate term.
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Lance Brofman Apr 12, 2015

Most investors now believe three things about the Federal Reserve, money and interest rates. They think that the Federal Reserve is artificially depressing rates below what would be a "normal" level. They believe that in the process of doing so the Federal Reserve has enormously increased the supply of money and they believe that the USA is on a fiat money system.
All three of those beliefs are incorrect. One benchmark rate that the Federal Reserve has absolute control of is the rate paid on reserves deposited at the Federal Reserve. That rate is now 25 basis points, after being zero since the inception of the Federal Reserve in 1913 until recently. If the Federal Reserve had left that rate at zero t-bill rates would now be even lower than they are now. The shortest t-bills rates would now be probably negative.
Paying interest on reserves combined with the subsidy to the banks of providing free unlimited deposit insurance on non-interest bearing demand deposits is keeping t-bill rates positive. Absent those policies the rate on t-bills would be actually negative. The Chinese and others all over the world are willing to pay anything for the safety of depositing funds in the USA. Already, Bank of New York Mellon Corp. has imposed a 0.13% charge on large deposits.
An investor who believes that interest rates are headed up may respond that the rate paid on reserves is a special case and that the vast increase in the money supply resulting from the quantitative easing must result in higher rates when the Federal Reserve reverses its course. The problem with that view is that the true effective money supply is still far below its 2007 level.
Money is what can be used to buy things. Historically money has first been specie (gold and silver coins), then fiat money which is paper currency and checking accounts (M1) and more recently credit money. The credit money supply is what in aggregate can be bought on credit. Two hundred years ago your ability to take your friends out to dinner depended on whether or not you had enough coins (specie) in your pocket. One hundred years ago it depended on the quantity of currency in your pocket and possibly the balance in your checking account if the restaurant would take checks.
Today it is mostly your credit card that allows you to spend. We no longer have a fiat money system. Today we have a credit money system. Just because there is still some fiat money does not negate the fact that we are on a credit money system. When we were on a basically fiat money system there was still a small amount of specie in circulation. Even today a five cent piece contains about 5 cents worth of metal, but no one would claim we are still on a specie money system.
Fiat money is easy to measure; M1 was $1.376 trillion in 2007 and was $2.535 trillion in May 2013. The effective money supply is the sum of fiat money and credit money. Credit money cannot be precisely measured. However, when the person in California whose occupation was strawberry picker and who had made $14,000 in his best year was able to get a mortgage of $740,000 with no money down and private equity could buy a company like Clear Channel in a $20 billion leveraged buyout, also with essentially no money down, the credit money supply was clearly much higher than today. A reasonable ballpark estimate of the credit money supply is that it was $70 trillion in 2007 compared to $50 trillion today.
The effective money supply is the sum of the traditional fiat money aggregates plus the credit money supply. Thus, despite the claims of Ron Paul and Rick Perry to the contrary, the effective or true money supply has fallen drastically over the last few years...."
http://seekingalpha.com/article/1514632
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John Brian Shannon Apr 11, 2015

Hi Daniel,

Let's begin by looking at the cause of the problem.

Which is criminally irresponsible spending by some governments beginning in the mid 20th century. Those accumulated deficits translate into massive debt -- especially as compound interest is added over decades.

The staggering amount of public debt in some nations are mostly interest piled on top of interest, with some amount of that inverted pyramid extant as principal.

An excellent and quick resource here:
http://www.economist.com/content/global_debt_clock

Anyway, it's plain to see that nations which *didn't* spend their taxpayer's money like drunken sailors, running deficit after deficit, don't have a debt crisis/problem and their economies are generally performing well.

(Spain and Portugal are outlier problem economies with low debt, but hit with a massive housing bubble burst that was triggered by the 2008 financial crisis. But you knew that)

So, outliers aside, well managed economies have low debt and have little fear of rising interest rates. Were interest rates to return to historic levels, those economies would still be in fine shape and only minor budget tinkering would be required to stay on track.

Now, that's good governance!

For those economies with high debt-to-GDP ratios (which I interpret to mean D2GDP of 50% or more) any increase in the interest rate could become catastrophic.

(Again, there are outliers. Japan is in no danger of default and has among the largest D2GDP ratios in the world. Even at high interest rates, Japan has ample room to maneuver. Therefore, no crisis there. Therefore, Japan's D2GDP is not irresponsible)

Many other nations (with high public debt) should be red-faced in their shame for locking their taxpayers into a no-win situation, simply because they couldn't balance their national chequebook.

All it takes is basic accounting knowledge, and some fiscal discipline.

1. Don't spend more than you make.
2. Don't let debt-to-GDP pass 50%.
3. Pass balanced budget legislation if you're nation is debt addicted.
4. Pass legislation to pay down public debt to 50% of GDP or less -- and keep it under that.

It's so simple when you *want* to do it!

Besides Japan, Germany should get a free pass on my lecture, as not only was Germany suddenly faced with the trillion dollar costs of German re-unification after the fall of the wall in 1990, it has since been propping up other EU governments who failed to observe the four simple rules above.

And, Germany played a major role during the Cold War and *more than* carried its fair share during those decades.

Let's recap:

Some nations have a gift for running a tight ship. Congratulations to them! No wonder their citizens score them highly on the UN Happiness Index and they look so smart on the Social Progress Index (SPI).

Here is a link on SPI:
https://www.project-syndicate.org/commentary/economic-development-social-progress-index-by-michael-porter-2015-04

You are not the problem!

Other nations are outliers. I count four. They are not the problem, either!

Still others seem intent on sinking their economic ship, in the shortest time possible.

You are the problem.

Here's what to do about the problem economies -- and is a suggestion that can only help the outliers and the well managed economies -- keeping everything relative, without unduly rewarding bad behavior/punishing good behavior.

For nations that qualify (and in order of best managed economies, first, down to the worst managed economies, last) all of their existing public debt should be refinanced into Islamic financed debt in 2020.

To *not* punish well managed economies, let them refinance first (if they choose this option) to reward them/keep them competitive relative to the rest of the world.

The benefits of Islamic finance (Sharia finance model) are many, I can't possibly cover it all here.

But Sharia-compliant financing's *simple interest as opposed to compound interest* can make a huge difference to help economies get to minus 50% debt-to-GDP within (say) 25 years.

For those who qualify!

Yes, Germany, Japan, Spain, Portugal, are outliers, therefore, they should qualify first, right along with the lower-than-50%-debt-to-GDP nations.

Only then, should the higher than 50% debt-to-GDP ratio nations be offered this financing opportunity.

Wouldn't it be great if Greece ran balanced budgets until 2020, and therefore qualified for Sharia-compliant, simple interest and low interest financing of all its existing debt?

It would instantly lower their payments and debt servicing costs. And allow more taxpayer money to be directed towards infrastructure spending (creating jobs/better tax base) and government services for Greek citizens.

See what keeping your finances in order can do for you?

Here is a link about Islamic finance for you:
http://www.investopedia.com/articles/07/islamic_investing.asp

Just for the record, there is an unimaginably huge pool of funding available for lending through Sharia compliant finance. Those funds are not available for non-Sharia compliant use.

My only concern?

In the rush to help Greece and other spendthrift nations to stay afloat, we could bypass those nations which have worked hard to keep their economies sustainable -- thereby *punishing them for doing the right thing* -- which is always the most egregious insult of all.

While the Islamic finance model may appeal to some nations now, just wait until interest rates begin tracking upward again. Then we will see global panic all over again.

Best to get our economies in order now, and get them completely refinanced at 2.5% simple interest (or whatever the latest Sharia compliant rate is) and do away with compound interest as each nation qualifies for it.

As I said at the outset, free spending governments and compound interest are the culprits in our global financial system.

My suggestion is to build a better global public debt finance model that neatly solves those two problems.

1. Islamic finance public debt consolidation for those nations which qualify.
2. Balanced budget legislation.
3. Maximum 50% debt-to-GDP ratio, by legislation.

Thank you Daniel, for your always excellent essays. A pleasure to read.

Cheers, JBS
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Michael Public Apr 11, 2015

The song 'Money for Nothing' by dire straights is cynical of easy money made by bands who look good on MTV - i.e. the Milli Vinillis of the world. Easy money of today will be remembered by history in much the same way Milli Vinilli are considered i.e. as frauds.
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Stamatis Kavvadias Apr 11, 2015

"In fact, near-zero interest rates undermine the very notion of a “debt overhang” in countries like Greece, Ireland, Portugal, and Spain. While these countries did accumulate a huge volume of debt during the credit boom that went bust in 2008, the cost of debt service is now too low to have the impact – reducing incomes, preventing a return to growth, and generating uncertainty among investors – that one would normally expect. Today, these countries can simply refinance their obligations at longer maturities."

Either the author is naive or pretends to be.
Is it possible that it escapes the author that "Greece, Ireland, Portugal, and Spain" are losing their sovereignty to get these interest rates? Is it possible that the author boldly proposes that social interests, social cohesion and sovereign politics are secondary concerns, as long as there are near zero long-term interest rates??????
Get real!
- Stamatis Kavvadias Apr 12, 2015
  
  Maybe you, like Daniel Gros, believe that I should not be bothering your economic concerns with political concerns! Maybe you aspire to expand the useless economy for the 1% to the EZ. But, it seems EZ governments are not so sure of that either...
  A new reply to this comment has been posted.
- Stamatis Kavvadias Apr 12, 2015
  
  Vicky, I detest the rules of the EZ and I most certainly agree with you! Greeks are another story :-) I cannot speak for them. Maybe you can!
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- Vicky Lavendel Apr 11, 2015
  
  Stamis, there is a very easy way to avoid that: every country has the option to voluntarily leave the eurozone. But not even the new Greek government intends to voluntarily leave the moentary union, whose rules it detests so much.
  A new reply to this comment has been posted.
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Tomas Kurian Apr 11, 2015

...Treaty’s cap on public debt – and the "fiscal compact" adopted to reinforce it – is meaningless

and it always was.

As we have not imposed cap on profits and savings, so we cannot impose cap on debts - they are the two inseparable sides of the same coin.

Methods of capital redistribution – inevitability of state debt
http://www.genomofcapitalism.com/index.php/11-1-methods-of-capital-redistribution-inevitability-of-state-debt
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