Brief Note on Fiscal Debt and Long-Term Interest Rates

October 6, 2014

Hindsight is insightful as well as twenty-twenty.  While thinning out my files over the weekend, I came across an article from the April 28, 2010 issue of the Financial Times entitled Clock is ticking on Japan’s low debt yields.  The two self-explanatory lead sentences provide the gist of the entire text:

It is one of the biggest paradoxes in the debt markets: the developed country with the world’s biggest debt burden enjoys its cheapest borrowing costs.  But Japan’s ability to keep the yields on its bonds at their current low levels is increasingly being questioned, given rising alarm over its fiscal position and the absence of firm measures to tackle it.

Fast forward some four and a half years, and one now finds Japanese debt to be an even larger roughly 240% share of GDP, in part because of the sluggish expansion of real GDP that has barely exceeded 1.0% per annum.  Nonetheless, the 10-year JGB yield is 0.51%, down from 1.29% when the article was written.  The yield posted period averages of 1.18% in 2010, 1.12% in 2011, 0.85% in 2012, 0.71% in 2013 and 0.58% so far this year.  Japan continues to struggle to escape a liquidity trap, where even extremely low interest rates elicit very little private credit demand and bank lending.

Japan’s experience was pretty unique back in April 2010 but has been shared subsequently to varying degrees by other advanced economies.  The U.S. Treasury yields was 3.77% when the article was published, averaged 3.19% in 2010, 2.76% in 2012, 2.34% in 2013, and 2.61% this year.  It’s even lower now at 2.43%.  In the United States, like Japan, many pundits have for years been hailing a sharp upturn in inflation and long-term interest rates to lie just around the corner.  It hasn’t happened in the States, any more than in Japan, and another similarity is that bank lending has been soft. 

Truth in the laws of economics is situational in a number of cases.  When aggregate demand is excessive and inflation is accelerating, government deficit spending can indeed crowd out private investment, but that doesn’t happen when factors of production are under-utilized.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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