One chart to rule them all!

Higher debt means lower yields and less bonds. It's that simple!

You have nice charts, great charts, and incredible charts. As far as I'm concerned, the chart below falls into the latter category.

I've combined the total debt-to-GDP ratio (x-axis) and current 10-year interest rate (y-axis) for the 20 largest economies in the world (excluding Russia and Turkey.)

When you draw a 'best-fit- line through those twenty points, you get an extremely clear picture of the relationship between debt and interest rates. The higher a country's total debt, the lower(!) the interest rate. And although this completely contradicts what you're taught in economics class, and despite being at odds with what legions of economists claim, this outcome makes complete sense.

Interest rates must remain low to prevent the ever-increasing debt mountain from spiraling out of control. Especially because structurally faster GDP growth or long-term austerity measures – once two of the cornerstones of prudent fiscal policy – are no longer viable options in most countries, interest burdens must remain manageable. To achieve this, central banks, as extensions of governments, are forced to pull out all the stops to push down interest rates when needed.

That central banks are increasingly resorting to extreme policies is overwhelmingly obvious. We've moved from zero yields to negative yields, to unprecedented spikes in central bank balance sheets, to yield curve control. Moreover, the number of central bank stimulus programs increases with every crisis. From this viewpoint, there's no reason to assume that the central bank '2%-inflation- target' won't also be discarded. It seems only a matter of time.

Conclusion

Hard data prove that the global debt burden has risen to such elevated levels that only artificially low interest rates (and higher inflation) can stretch debt sustainability. From this perspective, questioning whether the financial system is bankrupt is understandable. However, as a pragmatic investor, you shouldn't just wait to see if or when the system collapses. It's much more rewarding to anticipate by adjusting your portfolio now. This means less (government) bonds and more scarce investments. It's that simple!

Thanks for reading!

Jeroen