Simon English: It doesn't really have to be the end of the world


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The Independent Online

Outlook From Reuters: "Germany easily sold €4bn of new, interest-free, two-year bonds on Wednesday, with investors edgy about European Central Bank plans to curb the debt crisis... Germany sold bonds with a zero coupon – meaning it pays no interest to the holder – for the second time this year, reflecting a fall in its borrowing costs to historic lows..."

To some minds news such as this, indicating that countries can presently fund themselves for nothing is evidence that government bonds are the next great bubble to burst.

When it does, it will make the housing crash and the fallout from the boom look like a nursery school teacher's picnic, they say.

It is certainly true that investors are buying US treasuries, UK gilts and German government bonds like there were no tomorrow, indeed, because they fear there may be no tomorrow.

Such safety-first activity has been in predominance since the crash of 2008, when people who got used to the good times were starkly reminded that they always end, that banks are speculative houses of cards rather than solid entities and that things can get worse far faster than they can ever get better.

The doom scenario goes like this: the safety-first crowd discover that what looks safe may not be. A serious dose of inflation sends interest rates rocketing, and gilts yielding nothing or close to nothing halve in value.

Investment portfolios are decimated, entire countries go bust because no one wants the next stock of lousy bonds which they need to sell to keep the lights on and the roads straight.

This view is relatively common in the City just now, partly informed by a crowd that just can't get their heads around the idea of lending money for nothing, unless there are also chicks for free.

There's an alternative scenario, far less dramatic but much better for all concerned.

At some point the belt and braces crew stop fretting about tomorrow, notice that we are all still here despite everything, and figure the end of the world can wait awhile.

They get bored of earning interest of 0.01 per cent and decide it's time for a bit of excitement. Slowly, they adjust their portfolios to higher-risk equities; they fund start-up companies and fall back in love with venture capital. The stock market rises. The economy grows. Pension deficits narrow.

A new chancellor says he's learnt the lessons of history and shall never overspend again.

Meanwhile, soaring corporation tax receipts are leaving government finances awash in black ink. He's going to have to spend that money somehow, if only out of embarrassment. Schools get better. Everyone lives longer and healthier.

And former Bank of England Governor Sir Mervyn King sits at the cricket and smiles. Quantitative easing worked. It drove down long-term gilt yields so spectacularly that in the end the world was forced to invest for growth.

He was right all along but is too polite to say so.

Anyway, he's already got a knighthood.