Germany is financing debt with negative interest rates. This is the beginning of the end. Seriously. Europe is doomed.
Last week, the German government was paid to borrow money.
This is the new world order. Everything is flipped on its head.
Germany was able to sell 10-year government bonds at a negative yield. That is, investors paid for the privilege of lending Germany money. If you bought these bonds and held them to maturity, you would get back less cash than you originally put in.
No accounting for inflation. Nothing. Nothing but a guaranteed loss.
If there are any of those investors out there, I’m willing to let you lend me money for free! Total bargain. Limited time only.
If this sounds nuts, it’s because it is. Totally nuts.
Think about what it means. We all worry about the budget deficit here, but what if we were being paid to borrow. It doesn’t matter. In fact, the government should just be borrowing as much as it can at those prices. They’d be crazy not to.
New schools, new hospitals, a vitally important netball court? Doesn’t matter. Put it on the tab.
It’s the interest burden that makes debt a time bomb. It grows and grows, and at some point you’re borrowing to pay off the debt. That’s the dynamic that brings governments down.
But Germany doesn’t have to worry about that. There is no interest. In fact, they’re getting paid to borrow. Whee.
But why on earth would anyone pay the German government for the privilege of lending them money?
The answer? What else are you going to do with it? Institutional investors are running scared. They just want to be able to hold on to their money. In a world where it looks like you could lose your money at every turn, the promise of getting 99% of it back in 10-years, starts to look good.
(Also a lot of investment funds are required by their charters to hold a certain percentage of bonds in their portfolio, so they’ve got no choice but to grin and take it in the yield.)
A Contiki tour through Europe is like a trip through an old folks home these days. You never know who’s going to drop off next. Could be Britain thanks to Brexit. Could be Italy thanks to a collapsing banking sector. Could be Denmark thanks to a poor showing at the Eurovision contest.
In this context, Germany, who can still get around without a Zimmer frame, looks relatively spritely. Robust even. As the strongest economy on the block, it enjoys the privileges that come with stability – in this case getting paid to borrow money.
So Germany is laughing all the way to the Bundesbank. But how does the rest of Europe feel about it?
Because while Germany is getting paid to borrow money, Greece is being forced to sell off its ports to the private sector (by the Germans, and oh look, here’s some German investment banks waiting over here.)
And Italian tax payers are on the hook for bailing out the banking sector, and their bond holders, again.
Now, I’m not saying that Germany engineered this situation deliberately, though I am a massive fan of engineering. But how long can this go on for?
Rather than bring Europe together, the EU runs the risk of actually entrenching divisions, and making things worse.
In a world where investors are skittish, they’ll herd towards perceived safety (Germany), while running from perceived risk (Greece.) Greece can’t borrow money at any price. Germany is getting paid to do it.
How do you put a positive spin on that?
Its one of the reasons why Brexit was such a body-blow to the European project. Of all European nations, Britain probably had the least complaint about EU membership. There’s the immigration story of course, but the economy was relatively strong. People were happy to lend to the British Government. Britain wasn’t getting screwed over by suddenly finding itself in the same feeding lot as big countries like Germany and France.
But they voted to leave anyway.
So Britain’s exit must surely have inspired the populations of other, smaller EU countries – countries that are cutting public spending because its become too expensive to borrow money.
In my mind, the European Union is dead in the water.
Forget Lehman Bros and the GFC. We’re talking about the removal of the world’s second reserve currency, the break up of one of its largest trading blocks, and most likely in a bitter and spiteful political sh!tstorm.
I don’t even know how to start thinking about it. I’m going to try figure it out… watch this space. But I’d welcome people’s thoughts about to play it. I know we’ve got a lot of cluey investors connected to this blog.
But I think the time to start preparing is now.
I have seen a few people say that now is a good time to go to Gold. That might be true, but are you buying gold in US dollars? What happens to the US dollar when it’s only real competitor suddenly evaporates?
It spikes right?
That means the value of gold denominated assets (like gold) will fall. So gold doesn’t look like a great play to me.
Anyway, the ending has begun. Time to prepare for a Brave New World 2.0.
If Europe goes down, is that good news for Australia? Or Bad?