High (or hyper) inflation or long term zero (or negative) interest rates – how might the world pay its debt?

The divergence of interest rates, bond yields, inflation, currency strength, budget deficit and total debt of countries around the world has never been bigger. We look at how the US, the UK, the Eurozone, Japan, Switzerland and India are doing in addressing paying off their debt.

The United States of America

All figures as of today (March 5, 2018), all figures in brackets are 1-year changes

10-year bond yield: 2.82% (+0.33%)
Central Bank interest rate: 1.50%
CPI Inflation: 2.10%
Budget Deficit: Increasing
Total Debt: Increasing
Quantitative easing: Reducing
Currency Performance:
USD/GBP 0.7223 (-10.90%)
USD/JPY 106.1880 (-7.25%)
USD/EUR 0.8106 (-13.76%)
USD/INR 65.0001 (-2.33%)
USD/CHF 0.0094 (-6.98%)
USD/CNY 6.3512 (-8.03%)

Our thoughts: Rising inflation, rising bond yields and a relatively weak currency. With potential trade tariffs, short term inflation would rise quickly. Could it head for high or hyper inflation long term to reduce the value of its debt? Can the US really afford higher interest rates? (Read here). The US is an outlier now (read here).

United Kingdom

All figures as of today (March 5, 2018), all figures in brackets are 1-year changes

10-year bond yield: 1.46% (+0.33%)
Central Bank interest rate: 0.50%
CPI Inflation: 3%
Budget Deficit: Decreasing
Total Debt: Increasing
Quantitative easing: Unchanged
Currency Performance: GBP/USD 1.3844 (+12.24%)

Our thoughts: Lowering the budget deficit every year but the books won’t be balanced until 2025 (that target has changed several times – read here). Rising interest rates and unknown Brexit outcome but better performing currency over the past year. Higher inflation long term possibly.

Japan

All figures as of today (March 5, 2018), all figures in brackets are 1-year changes

10-year bond yield: 0.04 (-0.02%)
Central Bank interest rate: -0.10%
CPI Inflation: 1.4%
Budget Deficit: Decreasing
Total Debt: Increasing
Quantitative easing: Unchanged (expectation/guidance from Central Bank is that it will reduce – really?)
Currency Performance: JPY/USD 0.0094 (+7.82%)

Our thoughts: Aging population, largely internally held government debt, the Central Bank owns around 82% of ETF’s and is the largest shareholder is most companies (read here). Long term zero or negative interest rates are here to stay.

Eurozone (The big 5 of the Eurozone and those part of the G20 – Germany, France, Italy, Spain and Netherlands)

All figures as of today (March 5, 2018), all figures in brackets are 1-year changes

10-year bond yield:
Germany 0.62% (+0.28%)
France 0.91% (-0.06%)
Italy 2.00% (-0.15%)
Spain 1.51% (-0.22%)
Netherlands 0.69% (+0.08%)
Central Bank interest rate: 0.00%
CPI Inflation: 1.20%
Budget Deficit: Decreasing (for most countries which are part of the Eurozone), Surplus (for Germany and Netherlands)
Total Debt: Increasing (for most countries which are part of the Eurozone), Decreasing (for Germany and Netherlands)
Quantitative easing: Reducing
Currency Performance: EUR/USD 1.2335 (15.96%)

Our thoughts: Paying its way through with zero interest rates. Italy and Portugal which were considered  very risky are paying a lower interest rate than the US on both 2-year and 10-year bond issuances (read here). Even Greece is paying lower interest rates on some issuances than the US and bond yields have hit a new decade low (read here). If the strategy is working then why change it?

Switzerland

All figures as of today (March 5, 2018), all figures in brackets are 1-year changes

10-year bond yield: 0.00% (+0.13%)
Central Bank interest rate: -0.75%
CPI Inflation: 0.7%
Budget Deficit: Surplus
Total Debt: Decreasing
Quantitative easing: Unchanged
Currency Performance: CHF/USD 1.0634 (+7.51%)

Our thoughts: Negative interest rates have seen property prices and other asset prices soar, little point saving. Consumer debt is increasing. Like the Eurozone, Sweden and other European countries, the zero or negative interest rate strategy seems to be working for the Government so it is unlikely to change in the short term. And the Swiss National Bank continues to invest freshly printed money into equities making a profit (read here).

India

All figures as of today (March 5, 2018), all figures in brackets are 1-year changes

10-year bond yield: 7.76% (+0.89%)
Central Bank interest rate: 6.00%
CPI Inflation: 5.07%
Budget Deficit: Decreasing
Total Debt: Increasing
Quantitative easing: Unchanged
Currency Performance: INR/USD 0.0154 (+2.38%)

Our thoughts: Higher interest rates offer savers a lifeline, India is a nation of savers. Eventually growth should further reduce the budget deficit. Unlikely that interest rates will move too much in the short term. A lot of debt is held internally.

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