From HSBC's Anton Tonev.
Negative rates = deleveraging
- Negative interest rates on developed world sovereign bonds could reduce debt burdens and may be a market solution to overleveraging
- While the side effect of extreme money creation is inflation, the side effect of extreme debt creation is deflation
- We argue that the need for further deleveraging may be a reason why negative interest rates persist in sovereign bond markets
Bonds and deleveraging
While conventional theory suggests that central banks set base interest rates and that negative rates are a result of low inflation and slow economic growth, we suggest there may be an alternative explanation. Drawing on historical and cultural analogies, we view negative rates as a possible market response to the growing levels of debt and inequality in income and wealth.
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