Junior Gold Miner Seeker: Financial Repression

Saturday 19 May 2012

Financial Repression

Some Excellent FT Articles Recently.
Ultimately I believe there is a bigger bond bubble than there is a gold bubble.

The US and UK in particular have "forced" increased investments in their debt by
a) Quantitative Easing reducing interest rates which sees pension funds, receiving lower returns on bonds and gilts, discount future returns and increase investment in bonds to cover higher liabilities.
b) Banks core capital ratios increased. Tier 1 capital is "risk free" government bonds.

I would add another potential here. Putting over the counter Derivative contracts onto exchanges will require the posting of "good collateral" - government bonds of course ...!

Another key theme at FT Alphaville has been the shortage of good collateral. A world of governments printing bonds and debt, but not enough quality collateral...investors panicking into bonds.

Some recent quotes below

http://www.ft.com/cms/s/0/6886070c-a0de-11e1-851f-00144feabdc0.html#axzz1vLiDFXhh

Once investors bought government bonds for a risk-free return. Today, they’re buying return-free risk. Yet every central bank that can print its own currency is borrowing at rates that would have been considered a joke only a few years ago. Why? The answer is in the ugly phrase “financial repression”.

The Bank of England buys bonds, driving down yields, so company pension funds must discount future liabilities at a lower rate, driving deficits higher. The actuaries then demand more bonds to cover the higher liabilities. At the banks, the pressure for more reserves means holding more supposedly “risk free” government debt. So both banks and pension funds are forced buyers, thanks to rules designed for other purposes entirely.

The question is whether real investors should follow them. A buyer at today's silly prices must believe that they will get sillier, driven by “quantitative easing”, actuarial fascism in pension funds and uber-prudential banking regulations. It could happen, but this game is surely nearing its end.