What’s Behind Record Low Bond Yields?

Currently, yields on government bonds are at record low levels.It is telling that the current U.S. 10-year yield of about 1.5% is acually considered high.

In some countries, like Japan, Switzerland and Germany, the 10-year yield is actually negative even in nominal terms. And despite having higher inflation than these countries, Sweden’s 10-year yield is currently only a few basis points from zero in nominal terms. Inflation protected bonds are at about -1.5%. And if you look at government securities of shorter maturities yields are even lower. So what’s going on here?

Well, there are three possible explanations:
1) A “glut of savings”
2) Monetary expansion
3) Excess risk aversion from investors

Most likely, all three of these factors play a role. China, and other East Asian nations, have a large surplus of savings that they “export”. And as the European debt crisis have made countries tighten their belts and borrow less, creating a surplus of savings.

Meanwhile, as the drop in the prices of oil and other commodities have pushed down consumer price inflation, central banks, doubling down on their inflation-target ideology have pursued increasingly inflationary policies. The problem is that these policies have had much greater effect on the prices of assets. like bonds, than on consumer prices.

Still, it appears that these factors can’t alone explain the drop in bond yields. If they did, then stock prices would have been a lot higher than now. Valuations are above the historical average, but the implicit yield (the reversed p/e ratio), as well as the dividend yield, is relative to bond yields far higher than ever before, implying risk aversion from investors.

Venezuela & Texas

As you might have heard, Venezuela is facing economic collapse. Leftists, many of whom previously praised it as a role model tries to blame it on the sharp drop in oil prices.

Since Venezuela’s economy depend greatly on revenues from oil exports, it is no doubt the case that the price drop has weakened its economy, compared to how it would have been if oil stayed expensive. However, the point is that current weakness isn’t because of cheap oil, it’s that it wasn’t weak before only because oil was expensive.

Venezuela after all, isn’t the only country/region/state that is highly dependent on  revenues from oil exports. Yet you don’t see the hyperinflation and shortages that Venezuela suffers from in for example Saudi Arabia, Norway or Russia. And in Texas,the state whose oil industry, gained international fame in the 1980s through the TV series “Dallas”, not only aren’t wee seeing any shortages or hyperinflation, employment is up 1.6% in the latest year, not very different from the national average.



Brexit Would Be Good For Britain, Bad For The Rest

In little over two weeks, the people of Britain will vote on whether or not to stay in the EU or not. What’s to make of that? Well, in short, it would be good for Britain, but bad for the rest of us if they decided to leave.

There have been some anti-exit doomssayers “reports” claiming that Brexit would have devastating effects on the British economy. But while the initial uncertainty about the terms of future trade agreements could indeed initially have a negative effect, there is no reason to believe there will be a permanent negative effect. Britain is too important (the biggest export market) for the rest of the EU to start a trade war or anything like that.

Meanwhile, Britain would save all the money they now send to Brussells, and would be free of much of the Brussells regulations and could have even freer trade with the rest of the world.

So, Brexit would be good for the Britons (at least to the extent we overlook the indirect negative effects of what I’m going to write in the next sentence) . Unfortunately it would be bad for those of us who live in the rest of the EU. Britain is the most important voice for global free trade and against EU regulations, and so if they leave, the EU would become more statist.

So, despite the benefits of Brexit for the people of Britain, I hope the “remain”-camp wins

America Has Long Repudiated It’s Debt

Donald Trump has now suggested that America should “renegotiate” its national debt, similar to what has been done in Argentina, Greece and other low or middle income states.

That has upsetted some writers because it would jeopardize the status of U.S. Treasuries as “risk-free investments”. In a way they have a point as the higher borrowing cost this would mean would most likely outweigh any gains from debt writedown for the U.S. government, so Trump’s suggestion would be as he would put it, “a terrible deal”. While Trump may be a good businessman, he sure doesn’t understand economics.

One much smarter way to in effect repudiate its national debt is to use the old fashioned method of pursuing more inflationary policies by the Fed. That way the debt burden will decline even as Treasuries remain formally “risk free”. Because of money illusion and accounting rules, de facto debt writedowns through inflation are feared much less by investors than formal debt writedowns and would mean much lower borrowing costs for the U.S. government.


Pro-Freedom Americans Should Choose Libertarian Party Candidate

My preferered Republican candidate was Rand Paul, but unfortunately he never managed to gain much support. And then Ted Cruz seemed like the best candidate, but now he has pulled out of the race too.

So, we’re stuck with a choice between a man who, while having a beautiful wife and beautiful daughters and while being quite amusing, has views and a personality inapproriate for becoming the most powerful man on Earth, and a woman who represents a seriously flawed domestic and foreign (“Libya” just about sums it up) agenda and is as the Republican candidate accurately puts it “crooked”.

Being non-American I can’t vote in the coming election. But my recommendation for American readers is to vote for the Libertarian Party candidate, whoever that is (most likely it will be Gary Johnson). He doesn’t stand a chance to actually become President, but given how bad the candidates that have a a chance to win are, it is better for you to send a message by voting for him rather than the statist candidates of the two biggest parties.


The Lesson Of Palmyra

Recently, the Syrian Army and allied militia, backed by Russian air strikes, liberated the city of Palmyra from the group that calls itself the Islamic State (but refered to by many others as ISIS, ISIL or Daesh).

This liberation illustrates the foolishness of the U.S. strategy of supporting “moderate” rebels to defeat the Islamic State as this victory came after a truce between Assad and rebels that weren’t part of al-Qaeda or the Islamic State. In practice, these “moderate” rebels don’t focus on attacking the Islamic State. Mostly, they only fight them when they’re being attacked by them. Instead they focus on attacking Assad’s forces, forcing them to divert forces that otherwise would have been fighting the Islamic State. But now with those other rebels ceasing to fight Assad, Assad can now defeat the Islamic State.


Israel should abolish conscription

I am in principle opposed to conscription since it constitutes forced labor, or to be more blunt slavery. But as the great Ludwig von Mises pointed out, if the protection against foreign totalitarian rule requires it, it can perhaps be justified in some circumstances since freedom from totalitarian rule might be dependent on it. And in the case of Israel that was for long not an entirely unreasonable argument, given how much bigger the population controlled by enemy governments were.

However, there is simply no invasion threat to Israel right now. The two main invasion threats to Israel have been Syria and Egypt. Syria is a big mess with the government being busy maintaining control of the small fraction of the country it still  controls and the rebel groups (including the Islamic State and al-Qaeda (Nusra)) being busy fighting the government-and each other. Meanwhile, Egypt is controlled by a relatively pro-Israel dictator, dependent on the U.S., who is more hostile to the Hamas government in Gaza than to Israel.  Which means that there is no need for large numbers of ground forces, and therefore no need for conscription.

Israel still face the threat of missile attacks, from various groups, but that should be dealt with by improving and increasing missile defence systems like the Iron Dome, David Sling’s and  Arrow systems, and strengthening the Israeli air force. And in general by improving military Israeli military technology, not forcing young Israelis to unnecessary forced labor.