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.