When many want to borrow money the cost of doing so, the rate of interest, goes up. Wrong. When there is full employment, employees will ask for more money and inflation rises. Wrong. Trade is a good thing and improves peoples’ lives. Not so sure. If I can afford it, I should have it. Really? Many long-held assumptions and economic models are turning out to be mere mantra, and do not stand up to scrutiny.
This is the here and now and there’s no point saying it’s all wrong and will shortly go back to normal. The Western world has discovered this to its cost over the past decade and Japan has been struggling with 21st century reality for nearly 30 years. In a world weighed down by record levels of debt we continue to lend and pretend, surreally at record low yields. Famously Sir Peter Burt 'The Banker’, deputy chairman of Halifax Bank of Scotland (above), said: "Banking should be boring."
Daily, finance is being turned on its head, Switzerland’s UBS announcing it will levy a 75 basis point fee on the cash its wealthy clients hold at the bank. This is linked to the fact that Swiss two-year government bond yields are barrelling down towards 2015’s record low –1.3 per cent. Chase Bank Canada, which closed its credit card operation in March 2018, this month announced that all debts outstanding will be ‘forgiven’ – and people can walk away. Denmark’s Nordea Bank is offering a 20-year fixed-rate mortgage at zero per cent, zilch, nothing, free bunce. Simultaneously its rival Jyske Bank is offering a 10-year mortgage-backed security with a coupon of minus 50 basis points. Needless to say, these bankers predict that house prices will rise.
Over in Saint-Jean Cap Ferrat on the French Riviera, the world’s most expensive house sold at a massive discount this year. Acquired by the Campari drinks group when it bought Grand Marnier, it was initially listed by Savills at $410m; it went for $220m. On the oh so chic Italian island of Capri, nice villas are selling at a 40 per cent discount. London residential property is stagnating at best, both in terms of pricing and turnover.
If instead you had bought the Austrian government’s 100-year bond at par, when issued in 2017 with a 2.1 per cent coupon, the paper’s now worth €185 per hundred nominal. Good news for holders and a sensible way to run budget deficits. Meanwhile, Argentina’s 100-year sovereign US dollar bond, oversubscribed eight times when also issued in 2017, had dropped to 75c in January 2019, then collapsed on Monday 12 August to 54c per $1 when Mauricio Macri lost badly to Peronist Alberto Fernández in the first round of presidential elections. You live and learn.
Like many other government bonds, UK index-linked 10-year gilts have a negative nominal yield – a whopping minus 2.85 per cent; they pay a coupon plus RPI, explaining the price. The US equivalent, TIPS, has seen the issue that matures in 2042 rally from 87c per 100 nominal to $1 and 8c so far this year – and it’s still not at a record high price ($1.14).
In Mexico, where 70 per cent of the population is overweight, state-owned Pemex this month announced it will give staff bonuses if their Body Mass Index is below 25.
