It’s done… Debt is worthless

christian-dubovan-Y_x747Yshlw-unsplash

Peter Bobik
Consultant
Bratislava, Slovakia

Low interest rate is good only for the borrower, but what if the lender loses the motivation to lend because it is simply not worth it? What consequences can life have for us in an environment where debt is not worth it?

 

Cover photo: Low interest rates and available loans may not be commonplace soon

 

I would be glad if I was wrong, and I hope that a new era is not beginning. Economic realities are similar for several decades (or even a few centuries), and some things are unchangeable. For lending money, the lender receives interest as compensation for the loss of the ability to dispose of the agreed time. The Borrower pays interest for the possibility to dispose of these (foreign) resources for the agreed period. Clear, logical, obvious. But this is no longer the case and can have consequences. I don’t want to guess it, but I have to – that’s what this post is about.

 

German government bonds with a 30-year maturity have zero yield. The German government can borrow for free for 30 years. You can say that it is logical that Germany has a surplus budget (about EUR 47 billion for the first half of 2019), so it is not entirely “beyond the line”. Maybe you’re right. However, Slovakia is no different, Slovak government bonds maturing in 2033 have a yield of 0.03% per annum (as of 29th August 2019).

And for the most incomprehensible is the yield of the Italian government bond with a ten-year maturity, which for the first time in history has fallen below 1% (as of 29th August 2019). In the Czech Republic, they would say “that does not take my head away”. If the Italian government can borrow under such conditions, how likely is it to be budgetary responsible?

Beyond the Atlantic, yields also dropped to an all-time low and below the S & P500 dividend yield. This is worrying in itself, because investing in bonds is thus losing a substantial advantage and, indeed, a sense.

 

The debt ceased to be worth it . You may argue that this is not new, it has been happening in Japan for decades. Admittedly, someone has already followed this path, but the question is whether we can do it just like the land of the rising sun, where there are many realities that we do not have. As I ponder over Japan, I recall the sentence from the Hollywood blockbuster Rising Sun (1993) when Sean Connery tells Wesley Snipes: “Criminals do expect to be caught in Japan.” Do European criminals expect the same? Do we have the same statistical level of crime? Are we willing to work so much and be as loyal to employees as the Japanese? Here, for the sake of time, let me give you a shortcut – this parallel does not fit.

A worthless debt is a new experience for us, our “meadows and groves”. We cannot look back and learn. And since this is an extremely complex phenomenon, we cannot even assume with certainty. Perhaps it will turn out well.

But just a brief thought. What consequences can life have for us in an environment where debt is not worth it?

Looking at it through the main actors of this social interaction, the loan is strongly determined by the lender’s and the debtor’s motivations.

Debtors, whether they are individuals, governments or companies, pay for the money they want to use for what they don’t have and want it. Most of them are very motivating, we like to borrow. The lender does not know or does not want to use the money he has, and so he will pay interest on borrowing. Motivation to save is strong, we create savings for thousands of reasons and there are many.

But where our savings end dramatically and decisively affects the attractiveness of the yield offered by the place we store them, that is to whom we lend them. If there is no yield, we refuse to keep the money there for the agreed time. Why would we do that? Thus, we can say that in a zero interest situation, the creditor loses his critical motivation to act as he did when he still had it.

 

So what happens when all the money of unmotivated creditors begins to move? And the question is where they begin to move. Increasing the riskiness of investment assets is a logical accompanying phenomenon of low and zero interest on safer assets. And if this situation will last longer.

If the quick termination of the current situation is unlikely to appear, I will again allow a shortcut: so what will be the price of a square meter apartment in Bratislava in a few years?

 

Worthless debt has the potential to affect virtually every aspect of economic events . Such initiated changes will be complex, can be large and unforeseen. Are we sure we want this? Do we want this at a time when the standard set of economic relations has delivered us the most historically successful civilization level, the longest life expectancy, the lowest poverty that this planet has experienced? Do we want such a change?

I wish you a pleasant autumn. Warms will end, the weather will change. I welcome it because I know it will happen. And that’s good.

 



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