Salient to Investors:

  • The resumption of growth in the US and UK is in stark contrast to the 25-yr yield curve for government bonds of the developed economies, which indicate government borrowing real costs of negative or zero for up to 25 years. The contradiction implies investors do not expect the developed economies to grow fast enough to provide a risk-adjusted profit in the private sector.
  • Larry Summers says the equilibrium interest rate in the rich west that generates growth necessary for full employment may be negative.
  • Bond investors are implying that the UK’s and USA’s current reasonably rapid growth is just a short-lived period of catch-up after the recession of 2008-9.
  • The UK private sector, especially households, remains crippled by record debts incurred during the boom years.

Alternatively, low government real bond yields could be a result of investors seeking safety from:

  • Aging populations
  • Wealth inequality that channels profits to low-spending rich people
  • Inadequate education to compete globally
  • Belief that the West’s capacity to make society-transforming innovations has ended.
  • The Middle East on the brink of total chaos
  • China at risk of a crash as it tries to end its addiction to debt-fueled investment and growth
  • Russia seemingly intent on territorial expansion,
  • The EU unable to make the structural economic reforms that could end its economic decline.

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