Now that I’m someone who had written a piece of bond math, I feel emboldened by my newfound confidence. This isn’t confidence bestowed on me with a university degree or a position, but confidence that resulted from methodically exploring a topic and working it through until I arrived at an answer, that made a lot of sense to me. But as is often the way, while answering one question other questions can quickly arise, leading to a never ending stream of research projects and ideas, which is helpful for keeping me out of mischief. While I wasn’t able (or prepared) to explore the interactions between short, medium and longer term bonds, particularly as I simple assumed the lumberjack’s loan term was infinite, but there was a lot of details that are often “obfuscated” by the headline figures of 10Y yields.
The interesting questions that began to arise emerged as the idea of longer-term bond yields increasing would reduce the market value of these bonds. If these yields were to continue rising, and the value continued to fall, would that then not mean that the value of the debt outstanding would start to fall (while the par figure would remain unaltered)? If they could find holders willing to take a loss, longer dated bonds could be bought up at a discount. Interestingly, this is something that the bank of England has done since 2022, leading to a loss of £36 billion. The logic of this is beyond me, as surly that bank owes that money to itself, it can issue more debt, so until these assets are sold, no loss is realised, but they sold them anyway. With the help of AI, this is the equivalent to the tax revenue from 33 million average taxpayers (great job Andrew!). But if we were to reverse this idiotic decision, and rather than sell, the BOE chose to buy undervalued bonds, then hold them to maturity, would that not mean that loss would be reversed into an income of £36 billion? This may involve some balance sheet jiggery pokery, and some very compliant sellers able to log substantial losses, there appears to be an opportunity that buying and holding these bonds and paying yield to themselves, the situation could be reversed.
Building upon this potential course of action, if this was to be possible, it would then make sense to even promote higher yields, so the value of these longer termed bonds would fall even more. This is where we move into the realms of economist suggesting that the debt can just be inflated away to nothing, but unfortunately, there would be the small issue of the common peasant being totally ruined by inflation. This was what took place after the Second World War, where rates were set low, while inflation and real yields ran high, and also took place within Israel more recently. However, if again, we put inflation to one side, and just focus on bond yields, while the market sets longer term yield, the central bank is able to set short term yields (base rates), with an aim of influencing the longer-term yield. As a result, there is term risk premium, meaning the longer term tend to have high rates to account to unknown events between issuance and getting repaid. Interestingly, and I’m only just beginning to understand why this is the case, if the longer term yields are lower than short term yields (yield curves inverting), this suggests people don’t want equities and are attempting to protect their money in bonds, leading to their value increasing and yields falling. Historically, this scenario has been a predictor of recessions, due to the marketing demonstrating it is retrenching assets as they begin to see the signs of a broader market downturn.
If on the other hand, the central bank made a concerted effort to put up the yield on the longer term bonds, as was the case in 2022 (to reduce inflation), yields rose from 1.5% to 4.7% a year later. Rather than moving from close to zero to over 5 at the short end, they pushed short term interest rates upto 15%, while holders of longer-term debt would likely sell, with the prospect of much higher yielding short-term paper, the value of outstanding debt would collapse. Again, let us run some numbers, and rather than a lumberjack, we can simply use bonds as an example.
Bond 1: $100 yielding 5%
Bond 2: $100 yielding 15% or indeed 1.5% and 4.7% as was the case in 2022.
For Bond 1 to have an equivalent yield of Bond 2, it’s value would have to fall to £33.33. In this situation, the central bank could purchase the longer dated debt for a 3rd of the cost with shorter term bonds. While they would have to pay the higher rate of interest on these two bonds, they could then pursuing a rate cutting cycle, progressively refinancing their short-term bonds at ever lower rates, while the long-term bonds that have been put on their balance sheet are increasing in value (back to par). The central bank would have orchestrated a process where they were able to buy assets at a 66% discount before returning them to par value, effectively creating a 66% profit. To be honest, if the market knew this was going to take place, they would be able to easily front run any moves, such as shorting bonds before hikes and long bonds before cuts, creating all sorts of unintended consequences, but the idea of this is fascinating, if it could work in practice. Not least, if investors saw that rates would be reduced in the future, they may themselves begin investing heavily in high yielding bonds (6% 30Y gilts maybe), the very act would then reduce yields and increase value.
5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
While this may be an approach to resolving the current looming debt crisis, it would require a central bank head and political leaders with intestines of iron to get through the fall out, and likely recession and potential depression that could result from such extreme actions. But aside from that, the above, point 5 from the Communist Mmanifestos shows that the role of a central bank to set interests rates is something that a centralised party should not have, as it gives them too much power. The behaviour of the Bank of England demonstrated that with a mark of a pen, they are able to wipe out the blood, sweat and tears of 33 million individuals annual tax contribution. Such actions that consolidate power, finance and credit, for the benefits of those in charge, to then issue more credit moving forward is taking money away from the individuals who delivery services, work hard, build products that customers value. Hmmm, isn’t communism aims at giving power back to the “workers of the worlds”? While there is potential for a central bank to be able to account away ballooning debt loads, they shouldn’t be able to, unless a nation has deliberately and consciously voted to live in a communist society, where the central setting of the value of money that in turn funds controlled economic activity, but has great difficult actually putting food on the table.
While this piece was aimed at exploring another avenue after exploring what bonds were in the previous piece, I feel like I have arrived at a similar conclusion. From the first piece, bonds are un-investable, the value of the bond itself will fall, and even if the yields look attractive, that itself suggests the country you are lending to is not credit worthy. Then while the issuer of the bond may be able to get their house in order to be more credit worthy over time, because they have to power and the accounting voodoo to make the debt go away, they and their government have no need to get their house in order. They will do whatever they have to, to allow them to continue operating and stay in power, if that means blowing up your savings, your business and your debts, so be it.
So, I’m not a communist, I don’t like communist policies, I don’t want the central banks of communists, I don’t want communist money. Sorry boss, I’m tired of your fiat ways, you’re not my boss, I own my own body, I own my own mind, I own my own money. You have no power here, you are not my boss and I will not be part of your fiat, communist system.Now that I’m someone who had written a piece of bond math, I feel emboldened by my newfound confidence. This isn’t confidence bestowed on me with a university degree or a position, but confidence that resulted from methodically exploring a topic and working it through until I arrived at an answer, that made a lot of sense to me. But as is often the way, while answering one question other questions can quickly arise, leading to a never ending stream of research projects and ideas, which is helpful for keeping me out of mischief. While I wasn’t able (or prepared) to explore the interactions between short, medium and longer term bonds, particularly as I simple assumed the lumberjack’s loan term was infinite, but there was a lot of details that are often “obfuscated” by the headline figures of 10Y yields. The interesting questions that began to arise emerged as the idea of longer-term bond yields increasing would reduce the market value of these bonds. If these yields were to continue rising, and the value continued to fall, would that then not mean that the value of the debt outstanding would start to fall (while the par figure would remain unaltered)? If they could find holders willing to take a loss, longer dated bonds could be bought up at a discount. Interestingly, this is something that the bank of England has done since 2022, leading to a loss of £36 billion. The logic of this is beyond me, as surly that bank owes that money to itself, it can issue more debt, so until these assets are sold, no loss is realised, but they sold them anyway. With the help of AI, this is the equivalent to the tax revenue from 33 million average taxpayers (great job Andrew!). But if we were to reverse this idiotic decision, and rather than sell, the BOE chose to buy undervalued bonds, then hold them to maturity, would that not mean that loss would be reversed into an income of £36 billion? This may involve some balance sheet jiggery pokery, and some very compliant sellers able to log substantial losses, there appears to be an opportunity that buying and holding these bonds and paying yield to themselves, the situation could be reversed. Building upon this potential course of action, if this was to be possible, it would then make sense to even promote higher yields, so the value of these longer termed bonds would fall even more. This is where we move into the realms of economist suggesting that the debt can just be inflated away to nothing, but unfortunately, there would be the small issue of the common peasant being totally ruined by inflation. This was what took place after the Second World War, where rates were set low, while inflation and real yields ran high, and also took place within Israel more recently. However, if again, we put inflation to one side, and just focus on bond yields, while the market sets longer term yield, the central bank is able to set short term yields (base rates), with an aim of influencing the longer-term yield. As a result, there is term risk premium, meaning the longer term tend to have high rates to account to unknown events between issuance and getting repaid. Interestingly, and I’m only just beginning to understand why this is the case, if the longer term yields are lower than short term yields (yield curves inverting), this suggests people don’t want equities and are attempting to protect their money in bonds, leading to their value increasing and yields falling. Historically, this scenario has been a predictor of recessions, due to the marketing demonstrating it is retrenching assets as they begin to see the signs of a broader market downturn. If on the other hand, the central bank made a concerted effort to put up the yield on the longer term bonds, as was the case in 2022 (to reduce inflation), yields rose from 1.5% to 4.7% a year later. Rather than moving from close to zero to over 5 at the short end, they pushed short term interest rates upto 15%, while holders of longer-term debt would likely sell, with the prospect of much higher yielding short-term paper, the value of outstanding debt would collapse. Again, let us run some numbers, and rather than a lumberjack, we can simply use bonds as an example. Bond 1: $100 yielding 5% Bond 2: $100 yielding 15% or indeed 1.5% and 4.7% as was the case in 2022. For Bond 1 to have an equivalent yield of Bond 2, it’s value would have to fall to £33.33. In this situation, the central bank could purchase the longer dated debt for a 3rd of the cost with shorter term bonds. While they would have to pay the higher rate of interest on these two bonds, they could then pursuing a rate cutting cycle, progressively refinancing their short-term bonds at ever lower rates, while the long-term bonds that have been put on their balance sheet are increasing in value (back to par). The central bank would have orchestrated a process where they were able to buy assets at a 66% discount before returning them to par value, effectively creating a 66% profit. To be honest, if the market knew this was going to take place, they would be able to easily front run any moves, such as shorting bonds before hikes and long bonds before cuts, creating all sorts of unintended consequences, but the idea of this is fascinating, if it could work in practice. Not least, if investors saw that rates would be reduced in the future, they may themselves begin investing heavily in high yielding bonds (6% 30Y gilts maybe), the very act would then reduce yields and increase value. 5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly. While this may be an approach to resolving the current looming debt crisis, it would require a central bank head and political leaders with intestines of iron to get through the fall out, and likely recession and potential depression that could result from such extreme actions. But aside from that, the above, point 5 from the Communist Mmanifestos shows that the role of a central bank to set interests rates is something that a centralised party should not have, as it gives them too much power. The behaviour of the Bank of England demonstrated that with a mark of a pen, they are able to wipe out the blood, sweat and tears of 33 million individuals annual tax contribution. Such actions that consolidate power, finance and credit, for the benefits of those in charge, to then issue more credit moving forward is taking money away from the individuals who delivery services, work hard, build products that customers value. Hmmm, isn’t communism aims at giving power back to the “workers of the worlds”? While there is potential for a central bank to be able to account away ballooning debt loads, they shouldn’t be able to, unless a nation has deliberately and consciously voted to live in a communist society, where the central setting of the value of money that in turn funds controlled economic activity, but has great difficult actually putting food on the table. While this piece was aimed at exploring another avenue after exploring what bonds were in the previous piece, I feel like I have arrived at a similar conclusion. From the first piece, bonds are un-investable, the value of the bond itself will fall, and even if the yields look attractive, that itself suggests the country you are lending to is not credit worthy. Then while the issuer of the bond may be able to get their house in order to be more credit worthy over time, because they have to power and the accounting voodoo to make the debt go away, they and their government have no need to get their house in order. They will do whatever they have to, to allow them to continue operating and stay in power, if that means blowing up your savings, your business and your debts, so be it. So, I’m not a communist, I don’t like communist policies, I don’t want the central banks of communists, I don’t want communist money. Sorry boss, I’m tired of your fiat ways, you’re not my boss, I own my own body, I own my own mind, I own my own money. You have no power here, you are not my boss and I will not be part of your fiat, communist system.