Thursday, September 15, 2016

Don’t Be Fooled By Japan’s 
And Italy’s Low Interest Rates
"Anyone doubting the highly distortionary effects of massive money printing by the world’s major central banks need look no further than current Japanese and Italian government bond prices. These two countries have demonstrably worse public finances than the United States. But their governments can currently borrow at interest rates significantly below those offered to the U.S. government. .. That Japan’s public finances are on an unsustainable path would seem to be beyond dispute. Equally bizarre would seem to be the market’s highly favorable pricing of Italian government bonds. In addition to having the Eurozone’s second highest public debt to GDP ratio, Italy has among the weakest banking systems in Europe. Non-performing loans in the Italian banking system now total around EUR 360 billion or a staggering 18% of all outstanding loans. Making matters worse, Italy has a highly sclerotic economy that has shown practically no economic growth since it adopted the Euro in 1999, its economy flirts with deflation, and it has a dysfunctional political system that precludes the possibility of meaningful economic reform that might place the country on a higher economic growth path .. From the global financial system’s standpoint, the gross mispricing of Japanese and Italian government bonds is all the more to be regretted considering that the Japanese and Italian government bond markets are respectively the second and third largest such markets in the world. This has to raise the very real risk of a major shock to the global financial system when either of those two countries inevitably runs into difficulties financing their government deficits."
- Desmond Lachman is a resident fellow at the American Enterprise Institute
LINK HERE to the essay

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