,
10 tweets,
2 min read
Read on Twitter
Thread: I have been thinking about what people are claiming when they say that the low yield for German government bonds is NOT an increased demand for safe assets. They claim that somehow the ECB artificially manipulated the interest rate downward.
But if that was the case, shouldn’t we see a massive sell out of German government bonds ‘cause the safe interest rate is lower than capital markets require? And if that’s the case, we should probably also see inflation somewhere. In any event, don’t think quantities are falling.
That alone tells us we are seeing an outward shift of the bond demand curve rather than a disequilibrium move along the bond demand curve.
OK they say: not only does the ECB manipulate interest rates, some other government entities, the regulators, also command quantities. Some people just have to hold German government bonds. Btw: if this was true, the government bond market would be a pretty effed up market:
price and quantity controls!!! OK, suppose this is true: then all bond holders who can would sell their bonds to these regulated entities. Do we see that? And why is their regulatory demand recently higher? And btw: this would have to keep going until we only see regulated
entities holding German government bonds. This hot potato property of German government bonds just seems implausible. The opposite is true: everyone wants them!
Well, they say: if it was really demand for safe assets, then why don’t people hold cash or store things in bank deposit accounts?
Well, storing massive amounts of cash is expensive. Banks can go under. The German government is much less likely to do so.
No, the easiest and most consistent with the facts explanation is: precautionary (think Trump, Brexit and China) outward shift of demand for safe bonds leads to these low interest rates we are seeing.
As long as these interest rates fall (or not rise) the market wants more of these and the German government would correct a market failure that can’t provide these safe assets. For that reason, debt brake is stupid. /end
