CA Rishikesh S Ketkar
Central banks around the world are working round the clock to keep their interest rates as low as possible and flood the markets with money supply each passing day. One can only wonder when this helicopter money endemic will come to an end and real wages every keep pace with asset bubbles being created by all the transient money that is being printed.
Markets have come a long way since the Global Financial Crises (GFC 2008). Back then, Quantitative Easing (QE) was perceived as a once off lifebuoy event for sinking financial markets. Since the GFC, financial markets have seen progressive rounds of QE viz. QE2, QE3 and so on.
The once off lifebuoy event has now become a way of life for financial markets. Our minds have been progressively conditioned into accepting the fact that robust financial markets exist because of QE. Even the slightest mention of any QE tapering would cause great imbalance in present day markets, let alone any decision to taper or turn the money tap off. Turning the reserve bank’s money tap off would invite doomsday much sooner.
We seem to have reached a stage where reserve banks across the world appear to have lost the ability to think of any other unique and permanent solution as an alternative for their self-created monster, ‘Helicopter money’.
The quantum of QE since the GFC can be judged by the fact that US government debt pre GFC in 2007 was around US$9 trillion, this is now nearing US$28 trillion as of January 2021. This is an astonishing 300% increase in 13 years. Globally, government debt is a gargantuan US$278 trillion.
So, when do we conclude that the global government debt level is too high? Maybe at US$500 trillion or might be US$1 quadrillion. Our crystal ball does not have a definitive answer for this question!
Well, now is not the time for sure to label debt as ‘too high’, if we were to read the opening statement of Hon. Janet Yellen before the Senate Finance Committee in USA: “Neither the President-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big”. Sounds like the money printing press will continue to remain hot for many more years.
Our present-day world just needs a reason to print more money. Any reason will do. The reason in 2008 was the GFC, in 2020 it was the pandemic, in 2021 it might be another war and in 2030 it might be a foreseeable collapse of the oil industry.
Having said that, it is an undeniable fact that several million small and medium businesses have been saved from going bankrupt during the pandemic thanks to all the timely money supply and support extended by reserve banks and governments across the world. These businesses would just not have survived the pandemic related market crash had it not been for the timely support and money printing measures (read debt) taken up by governments around the world. In Australia schemes like JobSeeker, JobKeeper and JobMaker assisted businesses, workers and families in time when they needed it the most.
The various stimulus measures undertaken by the Australian government have indeed made us Australians proud to be a part of ‘The lucky country’ as we gradually recover from the pandemic in much better shape compared to most other countries around the world.
While governments remain busy framing and enforcing ‘responsible lending rules’ at the retail end of the financial markets, we are yet to witness ‘responsible borrowing rules and limits’ that mandate what levels of debt should a government be content with. The absence of ‘responsible borrowing rules and limits’ for government debt are promoting governments to take on more debt and eventually pass the mantel to the next government incumbent after every few years.
But the omnipresent issue of high debt level prevails. Government debt has been and continues to be too high. Add to this the joy of interest payment burden attached with every dollar of debt issued. A fundamental part of issuing these high levels of government debt and being able to continue to print trillions of dollars is to keep the cost of debt manageable. Cost of any debt as we know is ‘Interest’.
Welcome to the world of ‘Yield Curve Control’ (YCC) or ‘Yield Curve Management’ (YCM)
YCC is the phenomenon of Reserve bank becoming an active buyer of government securities (G-sec) in primary markets. Reserve bank would normally announce its intention to buy G-sec and set a floor price for G-sec in open market during regular trading sessions. Buying on a massive scale by the reserve bank sends G-sec prices higher. Higher bond prices naturally bring the yield of G-sec lower than what it would normally have been if the reserve bank’s intervention was eliminated.
Thus, lower yield becomes the new normal related to government debt. The ultra-low yield on exchange listed G-sec allows the countries treasury department to issue new debt at these super low coupon rates. Presto! We now have a perfect round robin scheme of issuing successive rounds of QE and progressively lower rates of interest with many countries now regularly issuing negative yield debt.
YCC ensures a long-term artificial market pricing mechanism where the basic feature of price discovery through supply and demand for a security is completely eroded. YCC has also been blamed for breeding traders’ complacency and risk myopia as traders place faith on their reserve bank to actively step in every morning and continue to flood the market with money.
Here is a closer to home example for Australian’s on how YCC works. On 3rd November 2020 the RBA announced its intention to purchase AU$100bn worth of G-sec over the next 6 months as a part of its quantitative easing plan while setting the interest rate on new drawings from its term funding facility from 0.25 per cent to 0.1 per cent. This was a major announcement. It set the tone for RBA to actively participate in G-sec markets while setting the yield curve across various maturities of debt.
On 10th Dec 2020 Australia joined an elite list of countries which issued debt with negative yield. The Australian Office of Financial Management sold March 2021 Treasury notes at -0.01% yield.
On 2nd February 2021 The RBA Governor Philip Lowe, amongst other items, made the following statement: “It (RBA) decided to purchase an additional $100bn of bonds issued by the Australian government and states and territories when the current Bond purchase program completed in mid-April. These additional purchases will be at the current rate of $5 billion each week.” That is nearly a billion Australian dollars coming in the markets every weekday! The statement further states “The board remains committed to maintaining highly supportive of monetary conditions until it’s goals are achieved” and that “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range”. Finally it concludes with the following: “The board does not expect these conditions to be met until 2024 at the earliest”. Sounds like a narrative gaining ground here to continue flooding Australian markets with cash till about 2024.
Printing money, issuing debt and yield curve control all go hand in hand to make money printing convenient and inflate the global debt balloon beyond anyone’s imagination. Perhaps the time to begin repaying this debt burden is factored in at the tail end of our next forward estimates.
Our grasshopper colony really does not care about debt levels anymore, so long as the sun is shining, interest rates remain low, markets are flush with funds and stock market hits new records. But there will be a day when it starts to rain. Well, that day major governments will get together and agree to begin another round of quantitative easing and print more money.
About the Author: CA Rishikesh S Ketkar is an economist, writer and speaker who writes about economic issues, monetary policy, economic policy and major trends in financial markets. He can be reached at https://www.linkedin.com/in/rishi-ketkar-b77b136/ or email@example.com
Bibliography: http://www.usdebtclock.org, https://www.finance.senate.gov/imo/media/, https://www.rba.gov.au/media-releases, https://www.aofm.gov.au/