Is the mechanism by which governments borrow at risk of seizing up?by Jay Elwes / June 24, 2013 / Leave a comment
Last week, Ben Bernanke, the chairman of the Federal Reserve Bank, said that the Fed would slow down, or in his words “taper,” its Quantitative Easing operations. By this, he meant that the Fed would pump less money into the US economy—and the possibility of a decrease in this supply of money, referred to by some economists as the only show in town, led to a slump in stock markets and prices overall.
Bernanke’s comments also led to a sell-off of US government debt last week, which led to bond yields jumping to a 22-month high—not good. The worrying conclusion from this is that, from now on, it might become harder for governments to borrow money. For the last 30 years, it has been relatively easy for them to do so by issuing bonds—contracts similar to IOUs—which are then acquired by investors who think the issuer will be good for the money. The bond-holder usually gets an interest payment. But is the appetite for bonds going to remain? There are signs that the answer is no and that this 30-year “bull market” in bonds is over.
If this is the case, and if it becomes harder to sell bonds, then borrowing costs will go up, for banks, businesses, governments—and if this happens, the consequences could be very grave indeed. Though the US is showing signs of economic recovery, the Eurozone remains very weak. There is also uncertainty about the health of the Chinese economy, which last week experienced a hair-raising credit crunch. At one point, the SHIBOR—Shanghai Inter-Bank offered Rate—hit 29 per cent. A sudden spike in inter-bank lending rates preceded the west’s credit crunch of 2008.
A spike in interest rates could blow away the first few, faint signs of global economic recovery and the knock-on consequences for governments, businesses, and lest we forget, individuals, would be appalling. The situation is as delicate as it is alarming.