Is the developed world staring down a fiscal crisis and a potential implosion of sundry hard/reserve currencies?
Maybe. I don’t know. And to be totally honest, I don’t care. It’s the whole “no kids, no interpersonal relationships” thing. I don’t have to fret over how miserable life might be for future generations, nor about the suffering of friends and family in a catastrophe. That’s a kind of freedom. Not a good kind, necessarily, but a kind.
Frankly, part of me wishes it would all just go ahead and disintegrate — the money, society, the environment, all of it. It’s headed there anyway, and ideally I want it to happen while I’m still “young” enough to ride around in a leather outfit with a shotgun and an Australian Cattle Dog like Mad Max (Mel Gibson, not Tom Hardy). Just once I want to sit on a sand dune and share a can of dog food with my best friend while we ponder the arid apocalypse.
Anyway, market participants are obsessed with fiscal folly in 2025, and that’s one reason longer-term bond yields are trending higher across the developed world.
You know the story in the US: 30-year yields are north of 5% and the Trump administration hopes they don’t go any higher. In Japan — where the curve’s steepening like a bat out of hell — 30s sport a three-handle now. Three-handle government bond yields in Japan. If that’s not an apocalypse harbinger, I don’t know what is. The same’s true in Germany, and the UK’s obviously a mess.
I’m not a fiscal fretter. Or at least not when it comes to developed economies which issue hard currencies. (Germany’s not a monetary sovereign, but they may as well be: They can’t issue euro at will, but they hold outsized sway at the institution which can, and they have a huge amount of budget room.)
That said, the setup currently is as dangerous as I’ve ever seen it. I mean, look: None of this is real in the first place. It’s all made up, but if you believe it can be more or less real depending on “the fundamentals,” we’re staring into a kind of oblivion.
Long-term borrowing costs are rising a lot at a time when governments are borrowing a lot more. That risks a multiplicative spiral for debt servicing costs. While it’s true that a government which issues its own currency can never default on debt denominated in that currency, there’s a laugh threshold somewhere — a threshold beyond which no serious person can be expected to have faith in the currency if the sovereign’s just borrowing more or issuing money to pay interest on old debt.
Making matters worse, the investor base for DM sovereign debt’s shifting in favor of price-sensitive buyers, which is to say buyers who actually want to be compensated fairly for whatever risk they’re taking, even if that risk is just the opportunity cost of tying up money in “boring” government bonds for a long period of time. That shift in the buyer base means prices are prices again: Markets have to clear, and in the presence of increased supply for assets with deteriorating fundamentals, sufficient demand could require large concessions — heavy discounting.
Finally, trust should be expected to diminish in a world confronting existential crises like climate change, de-globalization, the return of great power conflicts and mass migration. Loaning money to far flung locales, no matter how ostensibly creditworthy, is a less attractive proposition in an unstable world where today’s business as usual might be tomorrow’s every man/country for him/herself.
The tragic irony: Staving off or combatting crises — whether that means implementing a Green New Deal, re-industrializing, re-arming or addressing immigration — tends to be an expensive proposition funded by borrowing.
If you ask BofA’s Michael Hartnett, all of this suggests we may be approaching a global “losing the long-end” moment. “‘Anything but bonds’ is the most important trade on Wall Street in the 2020s,” he said, describing a “savage reversal” for a four-decade bond bull which was slain and buried “by inflation, monetary policy, fiscal policy and, more recently, trade and industrial policy.”
See you in the desert.
“Mo Money Mo Problems”
You are right again, damn it but Mel Gibson is an a##hole. You never use the word PONZI to describe today and you don’t mention Hyman Minsky (he did die) but he and I teamed up (off the record) for the concept of a 4 human generation cycle. Try them out – they all have been blow-outs – 1720, 1789,1865, 1940, 2025. Well, not yet. Stalingrad and Guadalcanal (1982) were the Mad Max events of the last Taylor-Minsky cycle. H. – you are making us think about the next. Thank you. The kids need us to stop it.
WHOOPS – one typo 1942 not 1982 – I am trying!
Indeed you are!
Let’s say (fantasy) powers decide to act to stop the madness … sure seems any solution would require cooperation & collaboration globally- yikes! These powers can’t even seem to rationally dialogue
So my fantasy is just that …can I have a can too?
Meanwhile, Swiss long rates declining.
How long does the Swiss army hold up if a major power decides, “Hmmm, There’s a lot of gold and stuff there, I think we’ll just take it” and nobody comes to help?
That same point applies to the Nordic countries and the Persian Gulf states and Singapore. So there really is no ohoice beside the EU (if there was such a place) or the U.S.
Switzerland holds investment for every country in the world. I think they don’t need their own military to protect them. Every other military has a vested interest in their independent banking remaining intact. That and the Alps remain a pretty impossible obstacle to overcome.
The Swiss are far from defenseless.
I dunno, I think we may need to live through Blade Runner before we get to Mad Max, though Silicon Valley types seem more intent on The Terminator instead.
Yeah, but Harnett also says “nothing more contrarian in ’25 than being long the long-end…we say return of bond vigilantes to = >5% GT30 yields cyclical buy opportunity.”
The Swiss will be fine. They all serve in their army (the men do, voluntary for the women) and are provided a fire arm upon discharge. Further, the safes have Dinky-Di in addition to the bullion.
I suppose that is a reason to try to get over the Alps or through the tunnels (that will be mined if it comes to it). I just don’t think it will be a successful venture.
Re Minksy: https://www.frbsf.org/wp-content/uploads/04161.pdf
What does the “laugh threshold” equate to in the MMT descriptive framework?
Well, that’s a good question. It’s really the question.
PayPal mafia and the Christian Nationalists are working fast to pull the plug and have us all on crypto. Funny lines of code will be worthless by the time we get to driving around in Ford Falcon Interceptors with our ACDs!