Bonds: caught in a debt trap
Ralph Atkins and Michael MacKenzie, Financial Times, 28 January 2015 (hat tip: NC)
“It was less than a year ago that negative interest rates were still largely a footnote in a dog-eared history book about 1970s Swiss monetary policy. Either bonds are mispriced and large losses loom for investors, or we have a big problem on our hands,” says Alan Ruskin, strategist at Deutsche Bank.
Borrowing costs tumbling below zero also create risks that could spread beyond the financial sector and become “real” economy shocks. Yields so far below historic norms raise worries about price bubbles across asset classes which could threaten financial stability and test sweeping regulatory changes meant to make the system safer.
“The lower asset yields fall, the higher the probability of a correction and the greater the compression, the greater will be the size of the correction,” says Nikolaos Panigirtzoglou, JPMorgan strategist. “If we do get inflation, it could be quite vicious.” ...In effect, the big players can't find a good use for free money.
“We’re in a period when investment should be high. People should be saying: ‘I can do something useful with all the cheap money and put it into the real economy.’ But the investment we’re seeing is very disappointing. In the energy sector it is actually being cut.”
Some fear an “easing bias” among central banks. Because they did not act to prevent lending booms in the past, they allowed debt levels to expand, which makes it much more perilous to push up the cost of borrowing now.
Mr Borio at the BIS warns that high levels of debt across economies have created a “debt trap” in which it becomes difficult for central banks to raise interest rates without inflicting damage on the real economy.
If you read (it is easier to google the headline, the direct link won't work without signing in to the FT site) the entire story, you will see that possible consequences are all over the map.
My guess is that you will get a more extreme version of what happened in preindustrial economies when the population began to outrun production, the essential commodities (food/land) would inflate in price, the price of manufactured goods would stagnate, and labor prices would get drop.
Today's economy is more complex. With the collapse of labor, you might not get actual inflation so much as an inability to find anyone who can actually pay for your goods. So that a gasoline price of $3, is like $12 in todays terms. You also are at serious risk of having a wind down of economies of scale with the world wide just-in-time manufacturing methods not being able to afford the now expensive transportation costs. Or, as the article notes, pricing could just spiral out of control. Hard to say.