This post is mostly for historical purposes. I know very little about economics, but I have a question/theory I want to pose and revisit later.
Right now the stock market is exceedingly turbulent. No one really knows if Europe will collapse or not, but the pessimistic voices are a sizable lot. However US government bonds are stronger than nearly ever. Which is to say, the rate of return that people are willing to take is lower than nearly ever. The 10 year is sub 2% and the 30 year is at ~3.5%. 10 years ago those numbers were both around 5% and 5.5%, respectively. 20 years ago both were at about 8%.
Many on the liberal/high-brow side of the economic debate are saying that these low borrowing rates (extremely low in terms of the government repaying the bonds) provide justification for massive short term spending, or at the very least moderate increased short term spending. More stimulus, basically. In the form of infrastructure investments mainly.
And they are right.
But here is my question/quandary (of where there may very well be a good answer that I’m not aware of): don’t we first have to ask why the rates are so low/strong? I ask because what if the answer is that the purchasers of these bonds (there are a ton, that is why the rates are so low) are doing it as a long term hedge against global economic collapse. That is: these aren’t just investments in the long term stability of the US. Instead they are investments in the long term stability of the US relative to the rest of the world. Which could very well be thrust into deeper and fuller and prolonged depression if European banks begin to fall.
The bigger problem:
So….so what, right? The problem is that if the lowering of rates is a sort of apocalyptic hedge (if the whole world begins to fall, at least the US government will pay us back while stocks and euro bonds become worthless) then it means we could have a very very difficult time actually paying back all of these bonds. Extending that- it means that rates this low may actually suggest that we should be careful about borrowing too much instead of believing this is an impetus for more.
Then again, if the global economy truly collapses (and the US economy with it) then bondholders will be the least of our concern and could very well be left out to dry, at least in the short term.
You have to ask yourself: If you had 10 million dollars to invest and you thought that the global economy was going to collapse in the next 5 years (or even 12 months), where would you put that money? Not stocks, that’s for sure. If Europe collapses then US stocks will probably lose at least 20% of their value overnight, maybe 50% over a longer period of time. Obviously not Europe. Not China. So that mostly leaves either US government bonds or a massive cartoon vault.
This is my post so that I can either find an economist to give an answer or so I can point back at it later and claim I predicted the apocalypse.
Have a great day.