Friday, November 17, 2023

Maybe compounding interest isn't a problem

 Read: https://www.msn.com/en-us/money/savingandinvesting/a-bond-doom-loop-should-mean-that-yields-rise-with-more-borrowing-but-history-says-the-opposite/ar-AA1k6e4V 

A bond 'doom loop' should mean that yields rise with more borrowing — but history says the opposite Story by fdemott@insider.com (Filip De Mott)

"But just as increases in corporate defaults tend to be sparked less by looming debt maturities and more by collapses in earnings, so fiscal crises in bond markets tend to be driven less by the inevitability of compounding interest payments and more by sudden collapses in credibility, currency runs and imported inflation," he said.

Also:

https://www.ft.com/content/d5c99487-11e1-4a68-aece-5a26f65dea7f

The third reason why large deficits are not associated with high bond yields is that, contrary to intuition, most borrowing is much closer at a system level to being self-funding than is widely recognised. You don’t need to work in an investment bank’s syndicate department to see the intrinsic logic in the statement that “someone needs to buy” each bond issue. Usually this involves a private investor withdrawing deposits from their bank account. But take a moment to consider the process as a whole. Provided the proceeds from the bond sale are at some point spent in the real economy, they produce an increase in bank deposits which exactly offsets the amount the private investor drew down for the purchase. Total bank deposits — or narrow money — are left unchanged.

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