UK, US, Australian + the PIGS Government 10 Year Government Bond Yields – February 2012 update

 

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I haven’t published these datasets for 20 months now because as far as the UK is concerned it’s really been status quo.  The UK Government have continued to run a budget deficit that isn’t sustainable.  There isn’t any of the promised austerity because government spending is actually rising.  This combined has resulted in the UK National Debt reaching around £1.13 trillion today.  That’s £18,021 of Debt for every man, woman and child in the UK.  Less than half of the population work in the UK, 29.17 million people working against a population of 62.64 million, so comparing the debt to this group means a debt of £38,699 for every worker. 

Government forecasts project the debt continuing to grow quickly with it reaching £1.5 trillion by 2016.  Meanwhile in parallel the Bank of England has “bought” £375 billion (33%) of that debt through the Quantitative Easing (QE) programme.  This has had the effect of forcing UK bond yields down to historic lows when under the scenario described in the first paragraph yields should have risen which would have forced the government to take action rather than masking the problem.  Now it’s important to remember that for bonds already in circulation that as yields fall prices rise and that’s what we’ve been seeing happening for a number of years now.  It is however important to remember that the opposite can also happen.  Should that happen not only would the cost of borrowing for the Government rise but also other debts like mortgages would also rise.  That would reduce affordability and would in my opinion reduce house prices (and other asset prices) helping the value argument here.  Instead of asset price deflation we’re seeing just about every asset type either holding or increasing in nominal value including housing, shares and hard assets like gold which to me seems to be making the problem we have even worse.  

I’m therefore watching government debt yields closely and what its showing is that since August 2012 those yields have been rising despite the Bank of England announcing another £50 billion of QE in July 2012.  This is not showing in mortgage rates yet because the Treasury and Bank of England are distorting the market independently there with the Funding for Lending Scheme. 

To me it seems like a lot of plates are now spinning in the air.  Will they be able to keep them spinning until the recovery arrives?  Now I’m not one of the highly paid Economists or Bankers that have come up with all of the schemes to save us all from the pain I believe we should have had but from where we are today I can’t see how what we have embarked upon will ever result in a recovery.  I believe we still need the asset price crash and subsequent debt write offs that should have occurred before we can move on.  Here’s the only way I can see it playing out from here:

• Option 1 is the option that I think the Bank of England and Government will take because they’ll try and stave off the inevitable until the very end to try and keep asset prices high.  This means the Bank of England will continue to buy bonds in an attempt to keep yields down through QE until at some point the markets realise that the level of QE is so large that the debt can never be sold back to the market.  This will leave the Band of England with no choice but to start to monetise the debt.  This will quickly devalue the currency, result in large levels of bond selling, rising interest rates, uncontrolled inflation and subsequent asset price deflation.
• Option 2 is the option where the Bank of England doesn’t continue to QE because it’s futile.  This would then mean the main buyer of UK debt leaves the market which should result in rising rates, controlled inflation (possibly even deflation) and subsequent asset price deflation.

Under both scenarios we see the asset price deflation that we should have seen when the recession first started.  We see the very bad recession (it will probably be eventually worse than it would have been had it been allowed to play out the first time around) which we should have had which will include the writing off of plenty of bad debts and a lot of asset price deflation.  We can then begin to grow again instead of the dead economy we have seen for a number of years now.  All the powers that be have done in my opinion is to stave off the inevitable and thus prolong the pain.  The only difference between the scenarios is that one will also leave us with an inflation problem.

Does anybody have a more positive scenario to share?

As always do your own research.

Assumptions:

• All yields are month end except February which is the 08 February yield