In a world full of absurdity, there is nothing more irrational than the following statistic. At this moment as you are reading these words there are more than 5 Trillion dollars’ worth of government debt that actually returns less money than you put into it.
Some of these bonds will return 99.5 cents for every dollar you put in, others will return a bit more; but none of them will give you back 100 cents on the money you actually invested.
And you can forget any notion of interest. These bonds pay no interest at all, and yet investors can’t get enough of these bonds, even though they are literally confiscating their savings.
Unfortunately, these are the times we live in. We have a massive glut of savings created in no small part by the G-10 central banks of this world, and yet no place to put them… which results in a vicious deflationary cycle that gives modern finance an Alice in Wonderland feel.
It’s easy to blame this state of affairs on the many bubbles that have been blown in the West over the past decade or so, but that’s only part of the problem.
The fact of the matter is that we are just getting older in the West, both individually and as a society. Part of the reason why we have such a mismatch between savings and spending is that the older people have all the money, but very few reasons to spend it.
And further complicating the matter, the younger generation has all the needs and wants, but don’t always have the means to pay for anything.
And think about this; the human lifespan can now be extended dramatically through western eastern and alternative medicines.
That means all those assets stay in the hands of an elderly generation who, as we just discussed, chooses to save rather than spend, only further delaying the distribution of assets to a younger generation who “would” spend if they “could”.
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Here is another statistic to consider. In 1940, when Social Security was created, the worker-to-beneficiary ratio was a whopping 159 to 1. Yet, by 1950 it normalized to around 5 to 1. Now, worker-to-beneficiary ratio is almost half that…at 2.5 to 1. It has been suggested that in 30 years, the demographic trend may translate to as little as 2 workers supporting 1 beneficiary; a beneficiary who thanks to the miracles of modern medicine, will continue to collect their Social Security checks for years and years and years to come.
This demographic is all too familiar in Japan. The country has the oldest population in the most advanced industrialized world, and it has struggled with the scourge of deflation for decades.
In the latest case of utter policy embarrassment, a few weeks ago the Bank of Japan went to negative interest rates, to both weaken its currency and stimulate demand. Unfortunately, it failed miserably on both fronts. The yen rose as the market saw the move more as measure of desperation rather than an effective way to generate growth.
Ten year Japanese Government bonds actually went to negative yield, meaning that investors were willing to lose money for ten straight years, just to get some safety.
That safety of course is illusory. There will come a time when the whole mountain of G-10 debt will come tumbling down like a pile of Jenga blocks.
Don’t forget that an increase in yields from 0% to just 1% will decimate the face value of all those bonds; and when rates finally rise, it won’t be in a nice, calm gentlemanly manner. The damage will most likely be vast and far more pernicious.
Hopefully we are many years away from such a scenario, but in the meantime when bonds give you nothing in return, gold… that old “barbaric relic” …is looking better and better.
Little wonder it’s popped higher since the Bank of Japan announcement. And that rally is likely just the beginning.
That dynamic goes a long towards explaining why no one wants your money. There is just no productive way to put it to use as the spenders simply have no excess income.
Until next time,
Mr. Schlossberg is the managing partner at BKForex. He is also a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide. Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley. Boris’ extensive experience in trading and developing momentum based techniques provide the foundation for BKForex strategies.