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« Blog Post of the Day - 6/12 | Main | Blog Post of the Day - 6/13/2007 »

June 12, 2007


Bond investor

ZB, again I have to disagree that rates "must rise" because of an extending demographic debt. The people owed this debt are also the ones in control of the assets. Rather than putting the assets into "less productive" assets, think of it as a shift to "lower volatility" or "less risky" assets. Lower-volatility assets imply bonds, which implies demand for bonds rises. This is essentialy self-insurance because the wealthy owners of assets are concerned with what you're concerned with: how good the promises of Social Security, corporate pensions, etc., really are.

Look at China for an example. Why is the savings rate so high? Because health care is horrible, state pensions are lousy, state-run companies are riddled with corruption and inefficiencies.

Look at Japan for another example. While there is a trend showing retail investors getting fed up with low rates and shifting to day-trading currencies, etc., a large chunk of Japanese wealth continues to be deposited at the post office (Japan Post), where it earns extremely low returns. Why? Because it's viewed as not risky, particularly in a deflation environment.

Finally, think about an American's primary expenses and investments over his/her lifetime. House? You can borrow that with a mortgage (a loan against your future income, with your house as collateral). College education? You can borrow that with a student loan, which again is against your future income (hopefully higher thanks to college education).

But retirement, now there's a different story. You no longer want to work for an income, and you no longer have the benefit of time to repay a term loan. So you can't borrow to fund your retirement. Hence you must accumulate assets ahead of time. Less risky ones are generally preferred.... leading to continued low interest rates.


I appreciate your comments. You make many good points and I will rethink the analysis. This is more of a investigation and hypothesis forming process than a polished thesis so any input helps me out tremendously.

That being said, I agree with your comparison to Japan - but the differences amongst our economy and theirs are too great to say this will happen or that will happen. Either way, it is clear that there are many things that will influence that.

A few points/ideas to counter your argument:

- The globalalization in the past few years makes it easier to invest abroad - treasury bonds in a deflationary environment may not be the best "risk-free" choice. Japanese investors are really enjoying New Zealand paper at the moment.

-Medical costs should continue increasing (barring structural changes in the industry/political landscape) as a demand picks up due purely to demographic reasons. It is a fact that medical costs are the greatest in the last few years of life. Will modern technology just shift this time period back a bit or will it extend the costly part of a person's life for life itself.

-Alternative energy reform and China's emergence - how will the possible lack of petrodollars no longer buying up US bonds if we have sustainable energy created here. How will the emergence of China and other Younger nations - which I contend will have better "demographic" credit ratings cause ours to look on a global scale.

-What are the implications of a shift away from the dollar as the standard?

-As emerging markets become more developed and technology improves will the global labor market become more competitive driving down wages for the tax revenue producers and causing the need to attract more Treasury Buyers to finance our budget?

Anyways, those are great questions you have, but my main hypothesis is that demographics explains much more than we think. I believe Japan is a great counter argument but is a peculiar economy - one of the world's largest but without many natural resources. It also had a very high savings rate before 1989 when things started to go crazy - something we do not have. I will look further into it and put a post up for you though. Thanks for contribution to the site.



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