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Guest Post: Will Bond Investors And Savers Have To Hold Forced Government Loans At Some Point In The Future?

Tyler Durden's picture


Submitted by Gu?nter Leitold

Will bond investors and savers have to hold forced government loans at some point in the future?

Numerous governments of developed countries are likely to fail when trying to liquidate their large debt burdens in an orderly way. Japan, for example, steadily widened its debt load over the past 22 years and thereby constructed the largest bankruptcy waiting to happen. Since 1990, new borrowings and interest payments were the biggest contributors to build up the Japanese state of pre-insolvency. While Japanese government bond yields have been around 2.6% p.a. on average, these yields were still 2% above nominal GDP growth of just 0.6%.

The chance of not being able to de-leverage is dangerously high when the free market requires a nation to pay interest rates significantly above its nominal growth rate. The nations of the European periphery, Portugal, Spain, Italy and Ireland currently overpay nominal growth rates in the long term bond market by 11,01%, 5.84%, 5.09% and 4.38% respectively. They are directly heading towards the need of a restructuring while Greece has a good chance of requiring a second one.

Nominal interest rates set around 1% - 2% below nominal growth rates for a significant period of time would be needed to help these countries to leave the debt build-up course behind. This change of interest rates would erase mark-to-market losses on sovereign bond positions for the semi-solvent banking sector, but it would also wipe out the carry and leave them without earning power on this part of the balance sheet. However, some of them would still need to restructure. Keeping the high government interest rates in place will lead to some spectacular restructurings in the future.

I assume if central planners decide to circumvent the already manipulated bond market and enforce much lower interest rates by implementing forced loans, there would be a big uproar for some time in the market. However, the negative wealth effect on the private sector would be more foreseeable and stretched out over a longer period of time. This definitely would decrease uncertainty. In my opinion, this measure would actually help to break through the downward spiral and avoid the much more devastating course towards a restructuring event with its negative side effects.

Everyone and their dog realizes that suffering the whole pain of a restructuring event at once is a bad alternative compared to spreading the pain over a longer period of time and spreading it in an orderly and less uncertain way.

It seems that the free market does not provide this option without harsh government intervention. The free market tends towards capital flight, wider risk spreads and thereby makes a restructuring event at the end of the road more likely. Greece for that matter has been half-solved at best and therefore has a good chance of being back on the brink soon.

I believe that at some point, we may see the implementation of a temporary regime which includes forced government loans for domestic private sector participants paired with strict capital controls for as long as the de-leveraging is going on.

This scenario however assumes a discontinuation of the belief or hope, that the private sector of stronger borrower nations (like Germany) will be able and/or willing to help to consume a private sector wealth haircut for other nations or the belief or hope that debt problems will somehow disappear, which never happened so far as I know.

At the moment politicians of countries with a tense financial situation might not like the idea of implementing such a regime now. Even if they agree in doing these measures, they may want to change the name from forced or compulsory loans (which have been used in the past to finance wars) to something nicer like "solidarity bonds".

Even Japan and/or the US may have to change to such a regime as soon as the marginal buyer of their bonds turns to a seller and/or some capital flight starts. This could occur after further rating downgrades paired with decreasing effects of their continued money printing efforts.

A regime like this would make sense until certain de-leveraging targets are achieved. Such targets could be expressed as debt to GDP and/or interest expense to total expenses. The targets should certainly include the frequently hidden government debt components like local government and agency debt, unfunded debt components, guarantees etc. Contrariwise the subtraction of certain eligible assets like cash, marketable securities, etc. should be permitted.

To guarantee that such financial repressions are not circumvented by the private sector too easily, these measures would have to be paired with temporary capital controls. Every domestic private sector participant (financial institutions, corporations, non-profit organisations, etc.) would have to subscribe to these "solidarity bonds" on a pro-rata basis related to the financial wealth (including gold and some other "inflation hedged" assets). Special wealth tax treatment might be imposed for those which fail to be in compliance with their subscription in the forced bond exchange.

The implementation may be easiest achieved by a tough regulation of all domestic financial institutions (banks, insurance companies, fund managers, pension funds, etc.). Banks would then f.i. have to hold a certain share of their client deposits in such bonds and accordingly pay a slightly reduced rate on customer deposits.

It is hard to predict which government policies are likely to be imposed in the future. Politicians, who are already unable to cope with the situation, may at first find it hard to take that route. However, from today’s point of view the sovereign debt situation will further deteriorate which increases the likelihood of a restructuring event. Harsh measures to exit the downward spiral and growing reluctance to pay high free market rates will make forced loans a more likely scenario.

This option may also be less damaging to politicians compared to tax increases, austerity measures, direct wealth taxes, more bail-outs and money printing. All this measures will continue to show that they have little effect on the construction of a successful de-leveraging process, while in the absence of significant growth, low cost funding is needed. If growth picks up, yields would automatically turn from negative to positive levels.

I believe that people will find many reasons why this can not be done. Critics will point out that this government funding scheme will be a direct toll on private wealth in order to liquidate government debt. There may be some unintended consequences like some people wanting to take all their money under the mattress, or an increase in non- financial asset purchases. However, the net effect would be significantly less damaging than the sudden stop of funding when a restructuring becomes expected combined with a massive uncertainly when a de-leveraging episode is needed but not executed.

Personally, I would hate to see some 30% of my financial assets directly or indirectly invested in such negative yielding bonds for about 7 to 10 years, but it may be worth paying this price in order to avoid the other devastating road some high income nations are currently on. The net present value of the other 70% of the portfolio would help to compensate for that.

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Wed, 04/25/2012 - 15:44 | 2374674 LawsofPhysics
LawsofPhysics's picture

WTF?!  The future is now for most 401k fools.

Wed, 04/25/2012 - 15:53 | 2374693 SheepDog-One
SheepDog-One's picture

401K's are now 40.1K's at best. These people have nothing to do but sit around all day coming up with these economic future theories, bunch of nonsense. Theyve monetized the debt, and next will be sudden plunge into WW3, thats all. Same as it ever was, history repeats again.

You know we're fucked when you see this kind of drivel spewed about. 'Make me take bad govt loans"? How about 'go fuck yaself'!

Wed, 04/25/2012 - 15:53 | 2374705 SHEEPFUKKER

I'll buy the worthless pieces of paper only if toilet paper costs skyrocket. 

Wed, 04/25/2012 - 16:15 | 2374779 dlmaniac
dlmaniac's picture

Everything we heard about Banana Republics will come to this land.

Wed, 04/25/2012 - 16:20 | 2374804 CH1
CH1's picture

Everything "registered" is under the state's control.

We always really knew that, but denial's a bitch.

Wed, 04/25/2012 - 17:10 | 2374930 Dr Benway
Dr Benway's picture

"Personally, I would hate to see some 30% of my financial assets directly or indirectly invested in such negative yielding bonds for about 7 to 10 years, but it may be worth paying this price in order to avoid the other devastating road some high income nations are currently on."


This has got to be trolling? 

Wed, 04/25/2012 - 17:14 | 2374947 LowProfile
LowProfile's picture


I assume if central planners decide to circumvent the already manipulated bond market and enforce much lower interest rates by implementing forced loans, there would be a big uproar for some time in the market. However, the negative wealth effect on the private sector would be more foreseeable and stretched out over a longer period of time. This definitely would decrease uncertainty. In my opinion, this measure would actually help to break through the downward spiral and avoid the much more devastating course towards a restructuring event with its negative side effects.

So, the cure for ills called by central planning is...

MORE central planning?

I was hoping it WAS trolling, but I don't think so.

Thu, 04/26/2012 - 01:00 | 2375677 CaptainObvious
CaptainObvious's picture

Nah, I don't think it's trolling...the author actually believes this plan will work.  I guess he never heard of Iceland, which told the bankers to go fuck themselves and is now thriving. 

I can't believe I have to say this again, but the solution to debt is NEVER more debt.

The author of this drivel can lick my sweaty sack.  I'd rather get shot in the ass and recover and get on with my life than spend a decade getting raped up the ass only to get shot at the end of the orgy.

Wed, 04/25/2012 - 21:39 | 2375395 vocational tainee
vocational tainee's picture

Then circumvention feels like circumsision

Wed, 04/25/2012 - 16:27 | 2374831 SoCalBusted
SoCalBusted's picture

Already have a wallet full of worthless paper

Wed, 04/25/2012 - 16:15 | 2374776 anarchitect
anarchitect's picture

The scenario described in the article, and the spin for how it would be sold, is very possible indeed. For that, it deserves a 5. For actually thinking that it's a good idea and justifiable, it deserves a 1. May your chains rattle lightly, Guenter.

Wed, 04/25/2012 - 16:21 | 2374806 Peter Pan
Peter Pan's picture

I agree. Instead of making taxpayers hand over their funds why don't they force taxpayers to take 1% loans from the FED?

Is Leithold another subsidzed academic or what?

Wed, 04/25/2012 - 22:22 | 2375447 Imminent Crucible
Imminent Crucible's picture

He's an imbecile: "It seems that the free market does not provide this option without harsh government intervention...Greece for that matter has been half-solved at best and therefore has a good chance of being back on the brink soon."

What a dumbass. "The free market" had absolutely nothing to do with what was forced on Greece. The free market would have enforced a market-clearing default that would have handed all the Douche Banks of Europe the 100% loss they deserved.

Wed, 04/25/2012 - 17:59 | 2374916 Benjamin Glutton
Benjamin Glutton's picture

In Soviet USSA Bonds buy l------->YOU<--------l

Wed, 04/25/2012 - 17:13 | 2374940 CrashisOptimistic
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On the day before the US lost its AAA rating, the 10 yr T was 2.58%.

It's now 1.98%  That's a decline of 0.6% nominal.  It's also a capital gain for holders of that paper of 23% in about 8 mos.

Why would you need to force people to take capital gains like that.  There is more of that to come as the rate goes to 1%, then 0.4% and then -0.5%.  

Terrified money has nowhere else to go.  Lots of capital gains yet to come.

Wed, 04/25/2012 - 17:16 | 2374949 LowProfile
LowProfile's picture


Why would you need to force people to take capital gains like that.

...Because the real return after inflation is negative?!


Wed, 04/25/2012 - 18:19 | 2375092 CrashisOptimistic
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I see no quoted inflation number of 25%.  You can imagine it and claim conspiracy here and there, but I have seen no 25% rent increases or gasoline increases.

That capital gain looks like a real return of 20ish% in 8 months.  I see no reason to dislike that.

Wed, 04/25/2012 - 18:40 | 2375138 LowProfile
LowProfile's picture

...And because it's that way now, according to the "Brianyi Ruler" indicator, it will always be such.  I see.


Wed, 04/25/2012 - 17:54 | 2375025 Id fight Gandhi
Id fight Gandhi's picture

Ww3 makes all the debt go away. Forced austerity after this orgy of debt and spending.

Wed, 04/25/2012 - 19:42 | 2375253 DosZap
DosZap's picture

Those with 401's and IRA's, and other savings vehicles in Banks, could wake up tommorrow and already be DONE.

Even a portion of your metals investments?.

This sounds like Greece, pissed at Germany for not willingly subsidizing their non chalant lifestyles, and month long vacations, and 25 hour work weeks.

IOW's, DO NOT expect me to suffer even MORE, to keep your (.goobs) nuts out of the fire.( you caused it, you fix it).

This is just ONE more way of continuing to kick the can, OUR cans,down the road.

IF, and a HUMONGOUS IF, they were to do this, and put a real budget/plan together, and stick to it,then we might be more willing to go along, rather than run the risk of the Deflation/Hyper Inflation monster.

But due to the past experinces with their inability to RUN a stable .goob, and under the rules of our Founding docs............with the Rule of Laws.

I say, Go piss up a rope.

Wed, 04/25/2012 - 15:45 | 2374681 Hondo
Hondo's picture

I don't find this happening without gunfire.........

Wed, 04/25/2012 - 15:49 | 2374692 cossack55
cossack55's picture

Agreed. Historically, the gunfire route works everytime its tried.  Whats that old yarn about the "Tree of Liberty"?

Wed, 04/25/2012 - 15:58 | 2374724 Vagabond
Vagabond's picture

When assholes in government are pissing on it, it's time to spill some blood?

Wed, 04/25/2012 - 16:01 | 2374738 LawsofPhysics
LawsofPhysics's picture

It already is.  Only when SNAP is ended do you get the gunfire.  My god man, wake up and read up on "financial repression."

Wed, 04/25/2012 - 16:59 | 2374903 MachoMan
MachoMan's picture

Is that gunfire likely more directed at anyone with anything to steal or governmental actors?

Wed, 04/25/2012 - 17:07 | 2374919 LawsofPhysics
LawsofPhysics's picture

Therein lays the rub.  

Wed, 04/25/2012 - 19:43 | 2375255 itstippy
itstippy's picture


One exuberant crowd is in the public square cheering as the big hollow statue of the (formerly) Great Leader is pulled down.  That's the crowd the "embedded" journalists get to video and show over and over and over again.

Meanwhile, a few blocks away, an even bigger crazed mob is looting the National Museum right down to the light fixtures.  That part of the revolution is not televised. 

Wed, 04/25/2012 - 17:10 | 2374927 Born-Again Bankster
Born-Again Bankster's picture


Wed, 04/25/2012 - 17:41 | 2374996 mrdenis
mrdenis's picture

Did you ever believe we would be where we are today without gunfire ?

Wed, 04/25/2012 - 18:02 | 2375048 1eyedman
1eyedman's picture

yes, the type of scenario he describes usually occurs (a la WW2) in time of total war; total state control; "totalitarianism to save democracy' type of scenario

Wed, 04/25/2012 - 15:49 | 2374690 thetruthseeker
thetruthseeker's picture

WTF is right.  This guy needs to go over to the New York Times op-ed page with this crap.  Is this website still Zero Hedge?  Or did I accidentally navigate to some statist blogosphere site?

Wed, 04/25/2012 - 17:23 | 2374900 Reptil
Reptil's picture

Disagree, it IS crap, but is put here intentionally to provoce a debate.

It is crap because there's no willingness to break out of the negative spiral right now: That willingness is presented as a given, but exactly the opposite is the case. I don't buy the "agony stretched out over longer period is better" line, since it is a downward spiral, and flattening it a bit will not magically turn it upward. THERE NEEDS TO BE SETTLEMENT. (and I don't mean through the BIS but that's clear i hope.)

With "mandatory loans" in place, which are not contracts but outright feudalism, there's even LESS incentive for those on the recieving end of the scale (which is hopelessly out of balance), to take a hit, and allow the much needed insolvencies. Much needed because they result in bad investments, and bad investments on such a grand scale is hindering the survival of the human race (and everything else with it's back to the sun). I don't think I'm excaggerating, since destructive planning is encouraged. One part of the people will welcome it as "culling of the herd", or "destruction is needed to make place for renewed spirit and  but that's an incorrect assesment. "Doing God's Work" my arse! Bad investments will not lead to better ones, when there's less people left standing to divide the spoils, and worse; these destructions are now FINAL, and will result in LESS for the ones left standing (or NOTHING). The fourth turning will be a last big turning. Species die out, simply wither away, after the brilliance of what made them rise above the foodchain they were once part of, has disappeared. I'm saying that brilliance is being quelled, stangled, with each further corruption into chaos. The "magic trick" with interest rates does not change the issue that there's no real growth, both in physical quantities of production, in quality (the bogus story of "progress" when monopolies nip competing technologies in the bud), or spirituality (if the cutthroats have killed of all creative souls, who will keep them from turning onto each other? they are by defitnition morally corrupt and bankrupt)

Let's take this a little further is you don't mind the slightly vague wording? This return to models of feodal society but then industrialised (sort of a polluted dark middle ages) is transgressing beyond the (IMHO workable) model of libertarianism, it strikes at the nucleus of what we are. And no, we're not a species that revolves just around the paradigm of "the strong praying on the weak in terms of the corrupt vs. gullable consumers", that's too one dimensional IMO.

Look here (skip to 13 minutes in) https://www.youtube.com/watch?v=KYW5Lxm_Kjs Excellent short but sharp observation by Michael Hudson.


Thu, 04/26/2012 - 03:18 | 2375810 connda
connda's picture

What's there to debate.  The OP is a freaking idiot.

Wed, 04/25/2012 - 15:50 | 2374697 Seize Mars
Seize Mars's picture

Uck-fay Is-thay

Wed, 04/25/2012 - 15:52 | 2374701 Robslob
Robslob's picture



In the 1930-1960 era the Government could hava absolutley beyond a shadow of a doubt confiscated retirement through the forced aquisitions of Government debt as a Patriotic initiative...now...not so much....

Wed, 04/25/2012 - 15:55 | 2374712 SheepDog-One
SheepDog-One's picture

Yea very few left still buying the patriotic 'take it up the ass for Uncle Sam, heres a free flag on a stick' crapola anymore.

Thu, 04/26/2012 - 03:20 | 2375811 connda
connda's picture

Yeah, I'd love to see a "War Bonds" drive in this day and age.  But then again, considering that the 80% (sheeple) take MSM as the "Word of God", who knows!

Wed, 04/25/2012 - 15:56 | 2374719 TwoJacks
TwoJacks's picture

no such thing as IRAs or 401Ks back then.  companies only offered pensions or nothing, so nothing to grab ahold of

Wed, 04/25/2012 - 16:28 | 2374833 Errol
Errol's picture

Also, in the 1930-1960 period the production of actual, real world goods was increasing (due to increasing actual, real oil production), so one could theoretically pay off a debt load.  However, the end of parabolic growth in oil production means the end of parabolic production growth of economies, period.  The instability and distress we're seeing in the financial world is just the very early stages of the adjustment to a continuous contraction that is being imposed on the human economy by the limits of a finite planet.

This article is just another proposal to loot any remaining assets of value to prop up the wealth conveyor for a bit longer.

Wed, 04/25/2012 - 17:42 | 2375001 Sophist Economicus
Sophist Economicus's picture

From the late 1950s to 1980, in the US, you actually HAD financial repression!    Passbook savings interest rates were held down at banks via legislation (negative real interest rates), the Treasury capped the 'natural rate of interest' on bonds (again negative interest rates), banks were forced to offer no interest rate on checking accounts, financial institutions were forced to hold government paper via reserve laws, silver was eliminated from circulation and Kennedy made holding gold outside of the US illegal.

That is how the US reduced the Treasury debt from nosebleed levels on the back of savers.


Same as it ever was

Wed, 04/25/2012 - 15:55 | 2374711 NotApplicable
NotApplicable's picture

Thanks to Benron and Greenspin we already are forced to hold that trash. As for the other two categories, "investors" and "savers," well, sorry, those classes are extinct, being reliant upon a failing standard of measure (or at the very least, you need to add the descriptor "nominal" to the terms).

One can opine upon whether or not "it can happen," but it's completely MOOT at this stage.

Wed, 04/25/2012 - 15:55 | 2374715 l1b3rty
l1b3rty's picture

the Nationalization of All Life!!!


Wed, 04/25/2012 - 15:57 | 2374718 SDRII
SDRII's picture

Retroactive War Bonds? Swapping real dilution for real dilution. Has to be accretive to consumption, no

Wed, 04/25/2012 - 16:16 | 2374781 El Viejo
El Viejo's picture

Call them War Baby Bonds.

Wed, 04/25/2012 - 16:10 | 2374720 SheepDog-One
SheepDog-One's picture

OH but dont worry though...its all good confirmed smooth sailing 'till after the elections'....yea sure.

Wed, 04/25/2012 - 15:58 | 2374722 WTF_247
WTF_247's picture

How do you "force" people/entities to take loans they do not want?  Since there is interest on debt, you are essentially stealing from them because interest has to be paid even if they do not touch any of the money.  I cannot imagine there would not be massive blowback to such a scheme.

I guess you could use TARP as a blueprint to force the loans to banks, but outside that realm there is no way you can force a private fund, company or person to "borrow" money from the government they do not need or want.  If you think that would go over well then I have a bridge to sell you.  Basically the only thing that would happen is massive fraud.  

If the government wants to force me to "borrow" $1 billion, I am more than happy to do so.  I will spend like there is no tomorrow and then declare bankruptcy when the debt is due.  It is their stupidity for making me take the money that will lead to their losses.

Wed, 04/25/2012 - 16:02 | 2374733 SheepDog-One
SheepDog-One's picture

They stuffed the bankrupt banks full of fake money, but no one would borrow, or could borrow....so now the bankster overlords are super pissed and will MAKE you take a fuckin loan, dammit, and youll LIKE it! And PAY ME INTEREST, motherfuckers!! Its the only way us central bankers know how to survive, fractional reserve lending, and if you wont cooperate then we'll FORCE you!

Wed, 04/25/2012 - 16:10 | 2374763 SDRII
SDRII's picture

reverse reverse accreting mortgage. that is one way to deal with negative equity

Wed, 04/25/2012 - 16:03 | 2374743 SDRII
SDRII's picture

You obviously didnt follow the pink editorial page and one William Buiter who now doubles as chief economist at Citi. He is a strong advocate of forced march negative rates. Why shouldn't there be negative rates when there are positive rates, he muses? Even the genius factory at Harvard arrived at the idea of having a random lottery of cusip serial numbers called for expiration monthly. You work and we decide if you save. 6 Ipads in every pot. Buy stock in Mountain  House.

Wed, 04/25/2012 - 16:05 | 2374748 SDRII
SDRII's picture

Bo Xilai Clan Links Included Citigroup Hiring of Elder Son



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