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Prices matter

Literally, money is pouring into debt as people wishing to deposit funds seek their last chance to fix good rates and corporations take the opportunity to secure money while it is available.

Three thoughts.

First, whoever says debt is unattractive is wrong.

Second, there is no hint here of unsustainability, so why is that question raised of government when its offerings are of higher grade than those being snapped up in the market?

Third, why are politicians so frightened of debt when that is so obviously what markets want?

I have no answers to those questions: the politics of anti-debt sentiment make no sense.

US corporate bonds (decent, 10 year) pay around 4.9%. Inflation is 3.4%. So, the real, inflation adjusted, yield is 1.5%. The prospective real yield is higher, as inflation is expected to fall further.

Spud has been telling us for years that everyone should buy bonds which have negative real returns.

Political economist shocked that prices matter. Film at 11.

8 thoughts on “Prices matter”

  1. Bloke in the Fourth Reich

    Isn’t the (wilful) failure to understand “prices matter”, or the belief one can ignore them by fiat, at the root of at least half of the political bullshit we have had to tolerate the last decade or two?

    If we take a wider definition of “price”, and add in the other side of any price bargain, then something approaching 95% of the last 20 years political bullshit.

  2. “inflation is expected to fall further” – this from the same people who told us that putting the money printer on max speed wouldn’t cause inflation, nope, we’ve got this theory, no worries.

  3. Dear Mr Worstall

    “US corporate bonds (decent, 10 year) pay around 4.9%. Inflation is 3.4%. So, the real, inflation adjusted, yield is 1.5%.”

    Not after tax it isn’t. Later, perhaps, depending on the tax rate.

    DP

  4. The great TMB has it:

    On no account should we refer to Murphy as a ‘political economist’ – he is a fraud who has questionable accountancy qualifications and works at academic institutions whose lack of rigour should ideally lead to them having their ability to award degrees removed.

    As to his idiotic post:

    Literally, money is pouring into debt as people wishing to deposit funds seek their last chance to fix good rates and corporations take the opportunity to secure money while it is available.

    – The US and UK are different. At the moment, despite the idiocy of Biden Markets still feel that the US economy is worth investing in – I wouldn’t be as sanguine about the UK’s ability to recover under Labour. He seems unaware that the US and UK are separate concerns. Additionally I’d say the likelihood of people losing money is considerable, as with any ‘surge’ people are basing their demand on historical trends. I think Bonds are a worthwhile investment currently but it’s not likely to be a smooth ride.

    First, whoever says debt is unattractive is wrong.

    If Making Straw men were an asset he’d be almost beyond value

    Second, there is no hint here of unsustainability, so why is that question raised of government when its offerings are of higher grade than those being snapped up in the market?

    That’s not the case for every government – I’d certainly not want to invest in Equatorial Guinean bonds were they convertible. Also the US debt is on the cusp of a downgrade and it’s only a political pressure being applied to the Ratings agencies preventing that. If Biden is re-elected (as seems likely) then I’d put good odds on it being downgraded to junk over the next four years.

    Third, why are politicians so frightened of debt when that is so obviously what markets want?

    Because they already have spent most of any perceived dividend from that debt on absurdities like ‘Net Zero’ and ‘DIE’ and they may have more foresight than a retired ‘accountant’ in Ely?

  5. ““inflation is expected to fall further” – this from the same people who told us that putting the money printer on max speed wouldn’t cause inflation, nope, we’ve got this theory, no worries.”

    It’s also expected to fall further by a lot of people who had been warning about the rise of the inflation in the first place, when the central banks weren’t keeping their eye on the ball. The forward indicators are pretty good. It’s not just the hardcore “Team Transitory” (have they apologised yet?) types saying it’s going to fall further from this point.

  6. Literally, money is pouring into debt as people wishing to deposit funds seek their last chance to fix good rates…

    If this is their ‘last chance to fix good rates,’ it implies an expectation that interest rates will be going down in the future. OK – maybe, maybe not. Then the Spud tells us:

    …and corporations take the opportunity to secure money while it is available.

    But somehow corporate borrowers have exactly the opposite expectation, thinking that funds won’t be available in the future – which implies an increase in rates.

    The idea of a market-clearing price (or rate) has completely eluded him, hasn’t it?

  7. There’s a useful (if lengthy) list of all the facts and concepts which Spud has difficulty in grasping, I think it’s called the Encyclopaedia Britannica.

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