Negative bond yields revive fears of secular stagnation

With over $ 10 billion in bonds posting negative returns around the globe, we are clearly in a period of deflation. Investors and policymakers rightly worry that the global economy is slowing much faster than most people had expected before the start of the year. The winner of the race between 10-year German and Japanese government bonds to a territory with deeper negative returns is currently Japan, with a yield of about minus 0.08% Tuesday (vs. 0, 03% for Germany). Nevertheless, the figure for Germany is not far from the figure of minus 0.19% reached in July 2016, while secular stagnation was at the center of the economy's concerns.

This tends to support the hypothesis of the "japonification" of the euro area. It goes without saying that Japan's experience was unique in the extent of the damage caused by the collapse of the dual stock market and property bubbles in 1990. Other parallels, particularly with regard to demography, are at the origin of reflection. It could also be argued that the parallels apply much more widely throughout the developed world.

In the aftermath of the financial crisis, loan growth was depressed as households and over-indebted companies paid off their debts frantically despite falling interest rates. This is a balance sheet recession of the kind that was originally identified by Richard Koo of the Nomura Research Institute in characterizing the Japanese post-bubble economy.

Following the example of Japan, Americans and Europeans have embarked on large-scale fiscal stimulus and extremely flexible monetary policy.

When public sector debt has exploded, policymakers have plunged back into fiscal orthodoxy, similar to the Japanese since 1990. The target was reached in 2016 when governments and central banks seemed helpless in the face of stagnation. Then Donald Trump launched a new fiscal stimulus.

Combined with the reflationary impulse of Abenomics in Japan and a sharp increase in taxation in China, this put the world economic spectacle back on the road.

The comparison should not be pushed too far, especially for the United States. As Adair Turner points out in a recent article in Project Syndicate, the US budget deficit was financed by bond sales to the private sector, while in China, the central bank indirectly financed bonds. large purchases of bonds by commercial banks. In Japan, the entire net increase in public debt was financed by the central bank.

In addition, the 10-year US Treasury yield at around 2.48% is still well above its lows of 1.36% in July 2016, unlike the 10-year German paper.

This shows too clearly the divergence between growth prospects in the United States and the euro area.

The Japanification of China, which is currently experiencing the largest population decline for centuries, is the result of three decades of implementation of the single child policy and declining fertility rates. According to the latest weekly bulletin of the Institute of International Finance, a Washington-based trade organization, the Chinese population has grown by 0.5% per year since 2005, compared with 1.3% in the 1980s and 1990s. Relax the single child policy in 2013 has had only a limited impact and it is unlikely that the downward trend will be reversed.

Based on data from the United Nations, the IIR estimates that the share of the working-age population has decreased since 2010 and that it will decline further by 2030 relative to the markets. mature. Elderly people, who now make up about 10% of the population, will exceed 20% by 2035. Demographics, therefore, give new impetus to Beijing's efforts to divert the economy away from investment rather than consumption. In fact, the savings rate has already decreased from an unprecedented peak of 42% of disposable income in 2010 to less than 35% last year.

In the past, urbanization in China has contributed to productivity. However, the reduction in the labor force related to economic growth is being erased, with fewer and fewer young people remaining in rural areas. The result will be that demand for residential housing, which has been a major growth driver for China, will be under heavy pressure.

All the world's largest economies are now facing slower growth problems. The lesson from post-crisis economic management is that only large-scale fiscal stimulus will be an effective remedy. Japan, however, is committed to increasing consumption taxes later this year. German tax attitudes remain stubbornly orthodox, while fiscal expansion policies in the United States and elsewhere are delicate. Adair Turner's preferred solution to slowing growth is carefully managed monetary financing to compensate for the increase in fiscal deficits. It puts forward a convincing argument, but it may take a more extreme deflationary scenario to convince Western policymakers to adopt such a radical measure.

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