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In the US and elsewhere, where commercial bank exposure to government paper is still close to all-time lows, the unwinding of grotesque over-exposure to bubble sectors like real estate (see chart below) will continue to underpin the secular bull market in government bonds.
Via “A Full Blown Deflationary Episode” Coming | zero hedge
Average compensation of government vs private workers.
The Absolute Return Letter points out a study by Reinhart and Rogoff where total government bond issuance to cover the costs of the financial crisis are estimated at $33 trillion (vs $10 trillion estimated by the IMF).
That would be roughly equal to total world private wealth (approx $30 trillion) and about a third of total world savings (that include, on top of private wealth, mutual and pension funds, insurances, reserves, ecc.) which amount to $100 trillion.
It had to happen sooner or later. It happened in the UK.
Via The Telegraph:
The UK Debt Management Office (DMO) attracted just £1.67bn in bids for its sale of £1.75bn of 2049 gilts this morning, its first uncovered auction of conventional gilts since 1995.
The cover of just 0.93 times is believed to be the lowest in history and far worse than the 0.99 times in 1995. The average cover of the last three auctions was 2.1 times.
The meltdown of our financial system that started in the summer of 2007 and then accelerated in September 2008 after Lehman Brother’s default, has been taken by many commentators and politicians as evidence to confidently state that free markets have failed. My point of view on this matter is rather different.
First, the market is not a time-independent stateless mechanism. It does not give at every time the optimal price given the current situation, but it reacts to a series of events and evolves in a more complicated way. It has “memory”, meaning that the outcome depends not only on current inputs but also on previous events. It is built of stocks (outstanding debt, inventory of unsold houses, inventory of oil, etc.) and flows (debt increase or repayment, number of houses sold per year, production and consumption of oil, etc.). In calculus terms, the market behavior can be modeled as a dynamic system defined by a set of differential equations where some functions (the “stocks”) are related and linked with their own derivatives (the “flows”). A differential system yields results that have exponential or oscillatory nature, can cause overshooting and undershooting with respect to an equilibrium state. In the past months, price fluctuations have been wild but that does not entail a market failure, simply a non-trivial response to a complex system.
Second, the market is just telling us things that we would like not to hear: many people have bought houses that they could not afford, many lived a lifestyle above their means, banks have lent too much money at spreads that were too low compared to the risk they were undertaking, managers have been paid too much money for poor results, governments have created pension systems that are blatant Ponzi schemes that can only be sustained by a growing workforce, and so on.
So before jumping ship and support a heavily regulated market, I would suggest to listen to what answers the free market is giving us.
