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Are You An Idiot?

If you own a government bond today you are an idiot.


The rate of return that one is paid to extend credit to governmental borrowers is close to, or in the case of more than one third of all outstanding such bonds, below zero.  That means, for those who make a €1 million 10-year loan to Germany, for example, they will receive no interest payments and in 10 years they will be repaid €970,000.  So, in the best of cases, the lender (you) will not have the use of the funds for 10 years and will be repaid €30,000 less than they loaned.  In the more likely case this lender will have lost far more than €30,000.  The reason for this is that global governments are deeply in debt; way beyond historically high levels. The global economy is slow, at best, and thus governments are under pressure to attempt further fiscal stimulus, which will involve further deficit spending, and an even larger amount of indebtedness.  You might get your loans repaid in full because these countries have access to currency printing presses, but as sure as the sun is warm to the touch you will be repaid with less valuable currency and thus you will suffer the loss of purchasing power, which is a more nuanced way of saying that you will lose badly even if you are repaid.  While you will have sat for 10 years earning no interest and had no ability to either invest that capital more intelligently or to spend it on things that might bring you joy, waiting patiently for your repayment of €970,000, prices for the things you will wish to purchase will likely have soared, not because of a surge in demand for those things but because the value of the currency will have plummeted. That, by the way, is the goal of central banks and governments.

So, let me repeat for emphasis, if you own these bonds, you are really an idiot.  Now, you may very well look at your brokerage statement and breathe a deep sigh of relief upon finding that you don't own any of these bonds.  I would encourage you to look deeper and ask some questions.  Do funds you own hold these bonds?  Do others invest your retirement savings for you, and if so are they invested into these bonds on your behalf? Do you own shares of banks, most of which own government bonds?  And finally, and perhaps most sadly, has your country's central bank purchased government bonds?  If so, as a member of that nation who is paid and who invests in that same currency that was printed by the central bank to purchase those bonds, you ultimately do have exposure that you cannot truly avoid.

So, yes, in the end we all are indeed idiots because no one can completely escape this fiasco.  However, there are gradations of stupidity and we should take all the steps we can to minimize our exposure to government bonds and maybe to all bonds inasmuch as their yields are all are benchmarked off of government bonds and today offer a rather paltry return.

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