safe assets

This article in The Guardian deserves some comments:

There are several comments to the strange reasoning of the IMF:

As more and more countries and banks lose their credit rating there is a scarcity of safe assets. As if closing the eyes and pretending unsafe assets are safe should help! If there are too few safe assets, there is a very good answer to that – then the interest rate on (good) sovereign bond must drop. If sovereign bond interest rates drop into negative territory?  So what?

As it is with interest rates on sovereign bonds considerably under inflation rates the real interest rate IS negative.
The fact is that there are so many losses – impaired and unimpaired – out there: There comes a time when reality must kick in.
There seems to be an illusion that quantative easing increase money supply? If that is really the case: Where is the run-away inflation? No! QE just replaces unbooked losses. These take different shapes:


  • Banks can lend out money to good projects because the banks themselves can’t borrow: The banks creditors have lost confidence that they will ever see their money again. It could be because they won’t.
  • Diminished circulatory velocity of money: Service on debt is deferred – when distress interest rates don’t do the trick.
  • Loans are kept on book, though blatantly oblivious that the real estate property is not ever going to be sold without loss to the banks.
  • Businesses avoid banks – can’t get credit anyhow – financing day-to-day operations with receiving and extending supplier credit. But such credit is expensive – i.e. the real price on money. Difficult to calculate, as they often are in the form of discounts and other ways that pass the revenue accounts – and not the company’s financial accounts.


Is the IMF advocating a deeper excursion into Peter Pan’s fantasy world? Apparently: YES.

The problem is that losses will have to be taken at one time or the other – all the cozy seats in Fantasy World has been occupied by Japan for more than a score of years – and they are not moving any time soon.
Stimulate the economy? And run still deeper into debt?
What should that help? As it is there is no hope of ever earning enough to pay interest – let alone service principal. What is it we call a debtor that doesn’t service debt?

Oh, I’ve got it: It is a loss!

So governments took over the bad debt – fine: Now we end up with taking losses according to an installment plan – negative interest. Sometimes BEFORE inflation.
But is lack of good sovereign bonds the reason for the claimed financial instability? Or is it that the banks pretend they are a going concern? What would happen if banks took the losses they have so clearly suffered?


  • Shareholders will lose their investment! Yes, and? That is the reason for their existence – they are there to take losses. If investors aren’t wary of whom they are lending money – they are not investors for very long.
  • Depositors lose money – again: You can’t be too careful about whom you lend money.
  • Governments lose money – certainly: Just as they got money when the banks extended credit.

This attitude is just another example of trying to solve a financial break down – by using the real economy. That can be done to some extend; but the losses have a magnitude that no single generation can work off. And again: Why should they pay for investments that shouldn’t have been made in the first place?
No the only way is a nationalization of the Finance Sector – definitely not a preferred solution; but a necessity if you think the service of the banks are vital. Already businesses get along without their credit extention.
Of course the financial stability is endangered! It is stupid to lend money and not get them back.