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Pension funds own a lot of it but the Fed has more on their balance sheet, about a third of all US debt. But this is the same situation with most central banks

Pension funds own a lot of it but the Fed has more on their balance sheet, about a third of all US debt. But this is the same situation with most central banks - ECB, BoE - they have roughly a third of their respective national debts on their BS. It has been going up since the global financial crisis and accelerated during COVID. Central banks keep saying they’re going to taper but it will be very, very slow tapering in order to not hurt the economy. In essence, currency is being debased when central banks buy debt to protect the financial system from sudden shocks, and keep buying it because the economy remains fragile and gets hooked on the central bank asset purchases. Due to artificially low interest rates (because of said debt purchases) asset bubbles are formed elsewhere in the economy, and the ones who gain disproportionately the most from this are people who own invested assets, while those who don’t are no longer able to afford financialised assets like housing, or goods affected by inflation.

deafcalculus 5y ago
Central bank buying govt debt or QE is basically just maturity transformation. The Fed / ECB / BoE buys 10 year debt and issues cash which is also a form of govt. debt. IMO, when interest rates are as low as they are, it is foolish to issue short term debt. A lot of people like Martin Wolf and John Cochrane have been calling on govts to take advantage of the low interest rates and issue perpetual (or 50 or 100 year) debt and insulate themselves from sharp increase in inflation or interest rates.
- dharma1 5y ago
  if they find free market buyers for 100 year debt at current interest rates, sure. I'm not sure there will be many, so the central banks would end up buying most of it themselves. Soros is also advocating perpetual bonds for the EU/ECB, especially Club Med countries, with the whole union guaranteeing the debt. Northern EU member states are already subsidising the south/east member states, something like this would set it in stone for a long time.
  - deafcalculus 5y ago
    Pension funds are required to own some percentage of their assets in govt bonds. Also, many high net worth individuals have a strong preference for safe assets like govt bonds. And then there are speculators who think interest rates will fall and they'll make killing by actively trading on long term bonds. So, there will be buyers. Not all of it is being purchased by central banks.
    - dharma1 5y ago
      true, there are some free market participants but central banks such a big % of the buyers that if they stopped buying, rates would shoot through the roof
      - deafcalculus 5y ago
        I'm not so sure about that. When the Fed was tapering and starting to raise rates back in 2018, the bond market flashed warning signs in December 2018 with long term rates falling sharply and the yield curve inverting. Then there's also the market expectations of whether the Fed is willing to go with negative interest rates, which would influence the behavior of bond traders.
dimitar 5y ago
Low interest rates means there isn't a lot of easy money to be made and not a lot of people who expect their income to rise (which is partly western demographics), and since we are talking nominal, not much inflation. None of these things look artificial to me. This is an argument that central banks should be doing more debt purchases, not less. The long game of the central banks is to raise long term rates (the reverse of the current situation), but they either haven't been successful at it or think things will improve on their own.
- dharma1 5y ago
  Raising long term rates = central banks reducing their long term debt purchases - they are one of the primary buyers right now, keeping those rates artificially low compared to what free market rates would be. If central banks stopped buying medium/long term debt now, those rates would spike and the economy would choke. They can't do it. Central banks have a couple of primary mandates - (consumer) price stability ie. keeping inflation in check, and sustainable growth / employment. As long as the economy is weak and the official CPI figures don't show sustained inflation, they will keep printing (buying debt), in order to protect growth, employment and financial stability. We are getting to the limits of how much you can print without affecting inflation. They are unable to let longer term rates rise (by stopping or tapering debt purchaces) because the it will negatively impact the fragile economy - unless there is clear indication of sustained inflation, in which case they are mandated to act. This would also be very bad for the economy (inflation/rate rises plus economy stagnating). The only way out of this mess is for central banks to reduce buying debt very, very slowly and hope the economy doesn't choke and grows out of this. There is no other way.
  - jldl805 5y ago
    "There is no other way" = "There is no Plan B" Fortunately if we've learned anything from recent history, it's that our initial attempts at a solution are almost always successful and rarely are there setbacks, hiccups, or insurmountable obstacles along the way to the perfect realization of your immaculately designed strategy.

deafcalculus 5y ago

Central bank buying govt debt or QE is basically just maturity transformation. The Fed / ECB / BoE buys 10 year debt and issues cash which is also a form of govt. debt. IMO, when interest rates are as low as they are, it is foolish to issue short term debt. A lot of people like Martin Wolf and John Cochrane have been calling on govts to take advantage of the low interest rates and issue perpetual (or 50 or 100 year) debt and insulate themselves from sharp increase in inflation or interest rates.

dharma1 5y ago
if they find free market buyers for 100 year debt at current interest rates, sure. I'm not sure there will be many, so the central banks would end up buying most of it themselves. Soros is also advocating perpetual bonds for the EU/ECB, especially Club Med countries, with the whole union guaranteeing the debt. Northern EU member states are already subsidising the south/east member states, something like this would set it in stone for a long time.
- deafcalculus 5y ago
  Pension funds are required to own some percentage of their assets in govt bonds. Also, many high net worth individuals have a strong preference for safe assets like govt bonds. And then there are speculators who think interest rates will fall and they'll make killing by actively trading on long term bonds. So, there will be buyers. Not all of it is being purchased by central banks.
  - dharma1 5y ago
    true, there are some free market participants but central banks such a big % of the buyers that if they stopped buying, rates would shoot through the roof
    - deafcalculus 5y ago
      I'm not so sure about that. When the Fed was tapering and starting to raise rates back in 2018, the bond market flashed warning signs in December 2018 with long term rates falling sharply and the yield curve inverting. Then there's also the market expectations of whether the Fed is willing to go with negative interest rates, which would influence the behavior of bond traders.

dimitar 5y ago

Low interest rates means there isn't a lot of easy money to be made and not a lot of people who expect their income to rise (which is partly western demographics), and since we are talking nominal, not much inflation. None of these things look artificial to me. This is an argument that central banks should be doing more debt purchases, not less. The long game of the central banks is to raise long term rates (the reverse of the current situation), but they either haven't been successful at it or think things will improve on their own.

dharma1 5y ago
Raising long term rates = central banks reducing their long term debt purchases - they are one of the primary buyers right now, keeping those rates artificially low compared to what free market rates would be. If central banks stopped buying medium/long term debt now, those rates would spike and the economy would choke. They can't do it. Central banks have a couple of primary mandates - (consumer) price stability ie. keeping inflation in check, and sustainable growth / employment. As long as the economy is weak and the official CPI figures don't show sustained inflation, they will keep printing (buying debt), in order to protect growth, employment and financial stability. We are getting to the limits of how much you can print without affecting inflation. They are unable to let longer term rates rise (by stopping or tapering debt purchaces) because the it will negatively impact the fragile economy - unless there is clear indication of sustained inflation, in which case they are mandated to act. This would also be very bad for the economy (inflation/rate rises plus economy stagnating). The only way out of this mess is for central banks to reduce buying debt very, very slowly and hope the economy doesn't choke and grows out of this. There is no other way.
- jldl805 5y ago
  "There is no other way" = "There is no Plan B" Fortunately if we've learned anything from recent history, it's that our initial attempts at a solution are almost always successful and rarely are there setbacks, hiccups, or insurmountable obstacles along the way to the perfect realization of your immaculately designed strategy.