Submitted by reader JMD.
A follow up to “Why The RBA Sold Our Gold“
In my previous article I expressed the view that the RBA gold sales in 1997 were to extinguish a portion of the large amount of Australian government debt outstanding at the time of the Asian Financial Crisis.
The government was forced to extinguish debt rather than roll it over – (ie) issue new debt – or suffer significant devaluation of the Australian dollar, a ‘sovereign debt crisis’ if you will, as occurred in several nations to our north at the time.
Graph 1. shows how the central bank moves the interbank rate with the growth, or lack thereof, Broad Money, the broadest measure of financial system credit. A falling trend in Broad Money is generally equivalent to widening credit spreads, a falling (or flailing) stockmarket, higher government bond prices, bankruptcies…. in other words, a debt crisis or economic recession.
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As credit spreads widen the central bank lowers its ‘target’ rate in an attempt to bring rates down across the spectrum, from junk to ‘AA’ bank debt. Government debt of longer duration is moving along with the shorter term debt. I’m speculating here but the long term trend in the 10yr yield may be an arbitrage or ‘risk free’ profit for those borrowing short & lending long. In keeping short term rates low, central banks provide all the ‘liquidity’ the financial system requires and this ‘liquidity’ is used to ‘bid up’ longer term debt, thus long term yields are generally falling in tandem with short term yields. The ‘profit’ is the spread between short and long term yields.
Graph 2. is the monthly issuance of Treasury notes1 and bonds, to show the response of government to debt crises. If you read my previous article you know the end result of government responses and I am gobsmacked at the current level of debt outstanding, it’s not as if it is any more likely to be repaid than in 1997.
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One thing to note is the 10yr yield around the time of the Asian Financial Crisis in 1997. There is nothing that would indicate problems in the government bond market, in fact just the opposite, the 10yr yield was more or less falling throughout that period.
I think that those looking for a rise in interest rates to signify the beginning of a crisis are looking in the wrong direction. The crisis is already here, has been for some time & is reflected in the price of the only extinguisher, thus arbiter, of all (including if not especially, government) debt……gold.
Note: 1. Data for Treasury note issuance is not available pre June 1989.
Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.
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