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  • Writer's pictureEdward Ballsdon

Debt Sustainability and the Central Bank Credit Cycle

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 role of Central Banks in funding 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.

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