Monday 24 July 2017

With debt still rising, pay hike talks are unnerving

It will be at least a decade before the public purse can bear pay increases - not before

CHEERS: Raise a glass to cheap money. The German government is borrowing 10-year money at just 1pc and two-year money at precisely zero
CHEERS: Raise a glass to cheap money. The German government is borrowing 10-year money at just 1pc and two-year money at precisely zero

Ireland's borrowing costs in international bond markets have fallen dramatically over the last two years, the improvement dating from the 2012 announcement from the European Central Bank that it stood ready to buy eurozone sovereign debt if the markets came under stress. Yields have fallen everywhere, so the improvement cannot be attributed uniquely to the conduct of policy in Ireland, or to any improved performance of the Irish economy.

The ever-so-serious 
Financial Times knows how to keep its tongue in its pink cheek. The paper's coverage of the world's government bond markets - a dutiful recitation of th e previous day's events - has recently been appearing under the new heading 'Bubble Alert'. No explanation has been offered to the Pink Un's faithful readership, since none is needed. Quite simply, the low yields at which government bonds are trading around the world reflect easy money from central banks and make no kind of long-term sense. Something's got to give. Admittedly, that something might not give anytime soon - it was Keynes who cautioned that the markets can stay irrational longer than investors can stay solvent. But the current level of government bond yields will eventually come to be seen as an aberration and they will rise sharply.

In Europe, the German government is borrowing 10-year money at just 1pc and two-year money at precisely zero. On the latter deal, if you lend the German government €100, they will hopefully return the full amount over the two years but will deliver no interest whatsoever. That is to say, hanging on to your €100 note is a better option. Of course, the bond market is for institutional investors, currently so flush with liquidity, courtesy of the various central banks, that they are happy to have someone take care of their funds for a year or two with no return required. This is not some kind of 'new normal', it is unprecedented and it will not persist. The US central bank, the Federal Reserve, has already signalled that the next move in official US interest rates will be upwards and other central banks will do the same, some sooner than others. Interest rate increases in the UK are likely sometime in early 2015, but will perhaps come later in the eurozone.

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