IF you were a wealthy individual, worried about the economic environment that you were in, would you lend millions of dollars to your government at a nil interest rate?

Well, it seems that many people in the world think that is a fantastic idea.

The German government has pulled one of the best financial swifties of the decade. They’ve managed to sell €4.6bn (that’s $5,931,240,000 of our Australian folding dollars) worth of government bonds to investors, with a promise to give back that money in two years. That’s it. No interest. No cover for potential inflation. Just your money back. Given that inflation is quite definitely a positive figure, that means those extremely clever investors are PAYING the German government to hold their money.

A Spiegel Online article covers the specifics, along with commentary on how the developed countries that are printing money are contributing to these ridiculous propositions.

Lend governments money for free!

The trend really has become catchy. Global money managers are happy to lend to the Japanese government (with the largest level of government debt in the world…) at an interest rate of 0.1%. The United States lost its AAA credit rating when its politicians couldn’t agree to sign cheques for expenditure they had already co-signed agreements to incur – so how do they get rewarded? By having lower rates of interest to pay on any government debt. The USA government can borrow on global markets at rates of 1.74% for a full 10 years (!), and only need find 2.82% for 30 year, fixed interest rate loans.

Of course, sometimes governments actually get away with legal robbery without having to call such theft “taxes”*. The US government regularly sells Treasuries at rates close to or even below zero. This Financial Times article points out that in February 2012 the US government sold $33bn of four week maturity Treasury bills at an interest rate of 0.05%. And people opened their wallets to put $163bn on the auction table in a bid to get some of that juicy interest rate.

There may be technical reasons why interest rates can move to less than zero (such as when fund managers use Treasuries as collateral for contract delivery) but the current mix of investment fear and increased bank security requirements have funnelled into a “perfect storm” of conditions to bring about ridiculous interest rate levels.

Here’s a quick look at US interest rates on 30 year bonds. That is, the cost of funds for the US government to obtain money for shortfalls between expenditure and receipts.

So, under what terms would you lend a government money for 30 years?

Australian Government Bonds

Australian government bond interest rates have also hit 60 year low points, as foreign buyers (around 80% of Australian Federal Government bonds are owned by foreigners) have increased demand for the highest paying AAA rated sovereign debt in the world. Doesn’t that make you feel proud? Remember that our government is currently intending to cut expenditure (ie, take money out of the economy) so that it doesn’t have to borrow money for pesky things like ports, water, electricity and transport infrastructure or to provide facilities to better allow labour market flexibility so we can get unemployed people from where jobs aren’t, to places where jobs are.

If you were in charge of the economy struggling to meet infrastructure and growth bottlenecks,  and you could lock in the lowest interest rates for 60 years, what would you do?

And it could get even worse (better?)

In recent professional fixed income manager updates, the suggestion has been made that Australia’s government debt interest rates will fall even further – owing in part to the massive shortfall in AAA rated securities available in the world at the moment. Apparently, the “Basel III” international banking standards will require global banks to go out and find another 4 trillion (trillion!) dollars of highly rated securities, while the availability of such securities has reduced by around 9 trillion dollars, resulting in a 13 trillion dollar shortfall of available fixed income paper.

All of these things may be true – but if it was your money, would you go out and lock in record low interest rates for decades?

Politics versus economics

These are the kinds of weirdness that sprout up when politics becomes so adversarial that the participants are no longer interested in obtaining better outcomes for their country – they just want to make sure that the other team don’t get their way. In the EU there have been something along the lines of 9 governments fall since the GFC. Very few major economies are run by dominant parties. Instead, there is usually a minority government in place, hamstrung by having to make deals with smaller, extremist parties just to get their legislation through.

And so you have central bankers around the world going home at night to sit at the dinner table with their heads in their hands and cry in desperation at the impossibility of setting interest rate policy to their mandates, while having to do the work that elected governments are supposed to do.

Speculative bubbles

In the world of hsitorical perspectives on speculative bubbles, would this be considered a duck?

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Further Reading

I can’t really think of any. It’s a pretty depressing subject. It’s probably better to just open a bottle of good wine, crack out the cheese and nibblies, and enjoy time relaxing with friends and family.

* My flippant retort comparing taxes with theft is obviously a take on the famous toilet-wall graffiti sound-bite of anarchists and libertarians the world over. In the interests of keeping it brief, and reducing the time before you can put this down and get back to your wine, fruit and nibblies, we won’t go into the academic pro’s and con’s of Austrian School economics and Anarchist philosophy.