8 ms·

I would be grateful is someone could turn this into lower-level language!

igravious 11y ago
Seconded! Something bad is happening or is about to happen. But for the life of me I couldn't tell you what it is or what the ramifications both globally and locally are. Is he basically saying that the shit is about to get real? If so, what is the shit? edit: apologies for swearing, but I thought it was appropriate here given the _very_ strong language of the article. And I hate using/(being subjected to) aster*sks.
- Kluny 11y ago
  I am also waiting for a well informed adult to give us a summary. But from what I know of the bond market, bonds have been trading at an absurdly low rate for the past 20 years or so (please correct me if I'm wrong). This is an overdue correction, and is definitely bad for some people who have taken out an irresponsible number of bonds. But, possibly, will be very good for bond investors? I think?
  - igravious 11y ago
    And please correct me if I am wrong but when you own a bond someone owes you money. Thus the low rate of interest. (Very low risk vouchsafed by nation states.) If bond rates start going up then...? Bad for governments looking to finance services? As you can see, I'm really trying to understand from whence the article's tone. Who's gonna get burnt? Probably Joe Schmoe again, huh.
    - Kluny 11y ago
      Correct, I should have said "issued an irresponsible number of bonds", not "taken out". And yes, I would also like to know who gets burnt. It isn't very clear.
- fauigerzigerk 11y ago
  The shit is that those who have lent money to others through long dated bonds lose money if inflation rises faster than expected, because bonds pay a fixed interest rate for a fixed period of time. As no one wants to lose money, they sell the bonds and bond prices crash, leading to more losses. People who can afford to lend money to others for extended periods of time are the wealthy and those with a lot of money in pension funds. So the losers' side is skewed towards the wealthier and the older. On the winning side are heavily indebted governments and corporates as well as people with fixed rate mortgages. As government spending has a redistributive effect and wages tend to rise with (moderate) inflation, the less well off, younger, working people are on the winning side as well. So there you have your political dividing lines. Newspapers who cater to those on the losing side (such as the Telegraph) are going to get hysterical at the sight of even the slightest whiff of inflation. There are global implications as well. Money flows where interest rates are higher. If interest rates rise in the US and in Europe, money will flow there from countries like India, Brazil or Indonesia. The currencies of those countries will fall versus the dollar because they are being sold, and as they are indebted in dollars, their debt load increases. In previous episodes that has lead to defaults among poorer countries. But this time, these countries are not as heavily indebted as back in the 1980s and 1990s. Some of them are under pressure from low commodity prices though.
300bps 11y ago
Essentially, a lot of investors bought bonds at tremendously low interest rates because they believed an extended period of deflation could happen. What appears to be happening instead is inflation of the money supply. If you buy a bond that yields 1.00% and inflation is negative 1.00% (i.e. deflation) then your real yield is positive 2.00%. On the other hand if inflation is positive 1.00% then your real yield is 0.00%. As data is coming out is showing that inflation is occurring and not deflation, investors are selling their low yield bonds. This lowers the market price of the bonds and since a bond's yield moves inversely to its market price, it raises the yield. EDIT: mild inflation is really what you want with our monetary system, not deflation. So this is not a bad thing for the economy per se but some investors that bought low yield bonds will lose money or opportunity as interest rates rise.
- deleted 11y ago
  [deleted]
- AnimalMuppet 11y ago
  Yeah, it doesn't break my heart that some gamblers guessed wrong and will get burned by it. I'm more concerned if they manage to wreck the regular (non-financial-sector) economy again.
bgilroy26 11y ago
When you buy a bond, you are making a loan. You have agreed to hand over a bunch of money today and in return you get scheduled payments from the lendee. The quarterly or biannual or yearly payments are set in a specific currency. If you recall the stories told about Germany after WW1, they jacked up their inflation because their repayment (pmts were to France, I believe) amounts were set in Deutsche Marks. Because the German gov't could print marks, they could raise inflation arbitrarily. Inflating the volume of deutsche marks in circulation makes each individual deutsche mark less valuable. So in the late 20s or early 30s, the German got had cut themselves a sweet deal handing worthless deutsche marks over to the French and the german people would buy loaves of bread with wheelbarrows of Deutsche marks, according to the tales. Inflation is not only the result of printing extra money. If workers become more valuable, their salaries rise and they have extra money to spend, the merchants they trade with can raise prices as well, etc. So from a naive, freshman macroeconomics view (ie mine), increased trade, increased demand drives inflation in the currency. By that same token, decreased economic activity, laid off workers etc drives deflation. In that scenario, money is worth more and more because many people don't have it. That's when someone on the street in the Great Depression trades a pound of apples for a nickel, when currency is scarce and valuable. So betting on deflation can be tantamount to betting the U.S. economy at large will tighten up and times will be rough. It is my understanding of the Telegraph headline that many traders bet on an economic downturn that never got as bad as they had hoped for.
- meatysnapper 11y ago
  My finance buddies have been waiting for the bomb to blow up for a decade. It's really a game of musical chairs. The less pessimistic view of this (which my aged father holds) is that the saving grace of the US is while we have problems, China + Japan + Europe have awful demographics and we're stealing many of their best youngsters. And our popular culture is amazing- nobody else is even close. Unfortunately, this means we probably won't address our problems in a timely manner. A Chinese meltdown makes the US a more attractive place to put money.
  - bgilroy26 11y ago
    >A Chinese meltdown makes the US a more attractive place to put money. You're totally right.The slowdown in emerging markets relative to their strength in the wake of the financial crisis could be the lion's share of the dollar's strength. The fact that we haven't had a government shutdown in a while could be playing a big part. This stuff is so complicated.

Seconded! Something bad is happening or is about to happen. But for the life of me I couldn't tell you what it is or what the ramifications both globally and locally are. Is he basically saying that the shit is about to get real? If so, what is the shit? edit: apologies for swearing, but I thought it was appropriate here given the _very_ strong language of the article. And I hate using/(being subjected to) aster*sks.

Kluny 11y ago
I am also waiting for a well informed adult to give us a summary. But from what I know of the bond market, bonds have been trading at an absurdly low rate for the past 20 years or so (please correct me if I'm wrong). This is an overdue correction, and is definitely bad for some people who have taken out an irresponsible number of bonds. But, possibly, will be very good for bond investors? I think?
- igravious 11y ago
  And please correct me if I am wrong but when you own a bond someone owes you money. Thus the low rate of interest. (Very low risk vouchsafed by nation states.) If bond rates start going up then...? Bad for governments looking to finance services? As you can see, I'm really trying to understand from whence the article's tone. Who's gonna get burnt? Probably Joe Schmoe again, huh.
  - Kluny 11y ago
    Correct, I should have said "issued an irresponsible number of bonds", not "taken out". And yes, I would also like to know who gets burnt. It isn't very clear.
fauigerzigerk 11y ago
The shit is that those who have lent money to others through long dated bonds lose money if inflation rises faster than expected, because bonds pay a fixed interest rate for a fixed period of time. As no one wants to lose money, they sell the bonds and bond prices crash, leading to more losses. People who can afford to lend money to others for extended periods of time are the wealthy and those with a lot of money in pension funds. So the losers' side is skewed towards the wealthier and the older. On the winning side are heavily indebted governments and corporates as well as people with fixed rate mortgages. As government spending has a redistributive effect and wages tend to rise with (moderate) inflation, the less well off, younger, working people are on the winning side as well. So there you have your political dividing lines. Newspapers who cater to those on the losing side (such as the Telegraph) are going to get hysterical at the sight of even the slightest whiff of inflation. There are global implications as well. Money flows where interest rates are higher. If interest rates rise in the US and in Europe, money will flow there from countries like India, Brazil or Indonesia. The currencies of those countries will fall versus the dollar because they are being sold, and as they are indebted in dollars, their debt load increases. In previous episodes that has lead to defaults among poorer countries. But this time, these countries are not as heavily indebted as back in the 1980s and 1990s. Some of them are under pressure from low commodity prices though.

300bps 11y ago

Essentially, a lot of investors bought bonds at tremendously low interest rates because they believed an extended period of deflation could happen. What appears to be happening instead is inflation of the money supply. If you buy a bond that yields 1.00% and inflation is negative 1.00% (i.e. deflation) then your real yield is positive 2.00%. On the other hand if inflation is positive 1.00% then your real yield is 0.00%. As data is coming out is showing that inflation is occurring and not deflation, investors are selling their low yield bonds. This lowers the market price of the bonds and since a bond's yield moves inversely to its market price, it raises the yield. EDIT: mild inflation is really what you want with our monetary system, not deflation. So this is not a bad thing for the economy per se but some investors that bought low yield bonds will lose money or opportunity as interest rates rise.

deleted 11y ago
[deleted]
AnimalMuppet 11y ago
Yeah, it doesn't break my heart that some gamblers guessed wrong and will get burned by it. I'm more concerned if they manage to wreck the regular (non-financial-sector) economy again.

bgilroy26 11y ago

When you buy a bond, you are making a loan. You have agreed to hand over a bunch of money today and in return you get scheduled payments from the lendee. The quarterly or biannual or yearly payments are set in a specific currency. If you recall the stories told about Germany after WW1, they jacked up their inflation because their repayment (pmts were to France, I believe) amounts were set in Deutsche Marks. Because the German gov't could print marks, they could raise inflation arbitrarily. Inflating the volume of deutsche marks in circulation makes each individual deutsche mark less valuable. So in the late 20s or early 30s, the German got had cut themselves a sweet deal handing worthless deutsche marks over to the French and the german people would buy loaves of bread with wheelbarrows of Deutsche marks, according to the tales. Inflation is not only the result of printing extra money. If workers become more valuable, their salaries rise and they have extra money to spend, the merchants they trade with can raise prices as well, etc. So from a naive, freshman macroeconomics view (ie mine), increased trade, increased demand drives inflation in the currency. By that same token, decreased economic activity, laid off workers etc drives deflation. In that scenario, money is worth more and more because many people don't have it. That's when someone on the street in the Great Depression trades a pound of apples for a nickel, when currency is scarce and valuable. So betting on deflation can be tantamount to betting the U.S. economy at large will tighten up and times will be rough. It is my understanding of the Telegraph headline that many traders bet on an economic downturn that never got as bad as they had hoped for.

meatysnapper 11y ago
My finance buddies have been waiting for the bomb to blow up for a decade. It's really a game of musical chairs. The less pessimistic view of this (which my aged father holds) is that the saving grace of the US is while we have problems, China + Japan + Europe have awful demographics and we're stealing many of their best youngsters. And our popular culture is amazing- nobody else is even close. Unfortunately, this means we probably won't address our problems in a timely manner. A Chinese meltdown makes the US a more attractive place to put money.
- bgilroy26 11y ago
  >A Chinese meltdown makes the US a more attractive place to put money. You're totally right.The slowdown in emerging markets relative to their strength in the wake of the financial crisis could be the lion's share of the dollar's strength. The fact that we haven't had a government shutdown in a while could be playing a big part. This stuff is so complicated.