by David Stockman, David Stockman’s Contra Corner:
In addition to the political revolt of the rubes, the establishment regime is now imperiled by another existential threat. To wit, the world’s central bankers have finally painted themselves into the mother of all corners.
Literally, they dare not stop their printing presses because the front-runners and robo-traders have taken them hostage. Recent developments at all three major central banks, in fact, provide powerful evidence that the end of the current Bubble Finance regime is near.
Thus, today’s Financial Times carries a piece on the September 1st milestone of one trillion Euro of bond purchases under the ECB’s QE policy, and the dilemma it faces about continuing beyond next March’s end date for the program. In a word, it is running out of sovereign debt to buy, yet even a hint that it intends to stop could spook the “market” into a drastic sell-off:
A global collapse in eurozone bond yields since Britain’s vote to exit the EU has dramatically reduced the stock of eurozone government paper standing above the yield threshold set for the ECB’s €1.7tn bond-buying project — raising concern that the ECB will have to make sweeping changes to avoid running out of bonds to buy….
“There are various estimates of when the ECB will hit a wall because it does not provide exact breakdowns of the bonds it already owns — but everyone agrees that it is close to reaching its limit,” said Aman Bansal, interest rate strategist at Citi. “And the bank cannot slow the pace of bond purchases without sending out a signal to the markets that something is wrong.”
The implication is startling. The ECB’s current cut-off for QE purchases is defined as bonds with a negative yield no greater than 0.4%. Yet according to the FT there will be no German bunds left to purchase under that standard by year-end.
Yes, the Germans have been the last bastion of relative fiscal rectitude on the planet, but that doesn’t mean the nation suffers for want of public debt. In fact, Germany currently has $2.0 trillion outstanding, and it hasn’t been shrinking any time this century.
So the prospect that there will soon be no eligible bunds for the ECB to purchase means that the entirety of Germany’s public debt will be buried in the sub-zero freezer. Already today the 10-year bund is trading at negative 0.09%, meaning that the whole maturity curve will soon represent the essential absurdity of the entire regime of Keynesian central banking.
To wit, there is no sane theory of economics that says any government should be paid to borrow long-term money by its investors. And that’s true even if you ignore the history of the last century in which no government has avoided the temptations of fiscal profligacy and relentless debt build-up; and also the empirical reality that going forward Germany and every other major developed economy is saddled with a fiscal witches brew of a shrinking work force and monumental welfare state entitlements.
The fact is, there is no plausible basis for subzero bonds even in a world of fiscal rectitude and balanced budgets. That’s because even with zero credit risk long term bonds need at least a 2% real return to compensate savers for the time value of money.
Yet at a negative yield of 0.5%, for example, the general price level would have to decline by 23% over the next 10 years to make ends meet, and by 40% in the case of a 20-year bond.
Needless to say, that ain’t going to happen in either this world or the next. Nor is there even a shred of historical experience to suggest it is even possible.
Indeed, not withstanding the severe deflation of the Great Depression, the price level by 1938 was well above where it started in 1912 prior to the onset of the severe inflation of the Great War. The naïve patriots who bought Liberty bonds never got their money back in real terms.
In short, there is no bond “market” left in the world. What we have is a front-runners casino in which debt is being priced by the Big Fat Bid of the central banks. And unlike real money investors, the latter are completely price inelastic. Draghi is intent on his $90 billion per month of QE and Kuroda on achieving 2% inflation, come hell or high water.
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