DEBT SUSTAINABILITY AND THE CENTRAL BANK CREDIT CYCLE
(Published 11 Oct 2023)
RESEARCH CONTENT (backed by data and charts):
US debt serving costs have risen rapidly and are now an important proportion of government revenues.
Assuming realistic trends, domestic investors now need to increase their government bond holdings by significant amounts in a relatively short space of time
Debt sustainability is thus questionable IF (and only if) the private sector is asked to shoulder ALL the supply AND take down a significant portion of Central Banks’ holdings.
In all likelihood the use of private sector savings to fund government deficits will eventually be too much for the market - especially so if there is an economic slowdown.
This environment should impact for the relative performance of government bonds to other assets
Just as in previous moments of stress, Central Banks will eventually have to absorb that funding pressure with new bouts of QE (and thus avoid debt/deflation).
This demonstrates the new dependency on Central Banks to fund existing debts and the Central Bank Credit Cycle (they are already mid way through the second such cycle).
The result of the ongoing Central Bank credit cycles is a blurring of the line between monetary and fiscal policy.