Game of Bonds

When I came to know recently that my grandfather was a big bond purchaser in our village, I became very curious and started to probe and understand the whole thing. I learnt that he would give loans apart from the regular wages to the laborers working on his farm to retain the labor force and also to some extent to meet their immediate finance concerns. Of course this he did in the exchange of promissory notes (bonds) from them.

Over a period of time, it seems, my grandfather had a bundles of bonds with him, as the laborers continuously sold bonds even for the interest payment and to raise money for fresh needs.

But I was later explained that my grandfather was not a fool to throw his money on this mindless bond buying program in the village, and indeed there was an infallible logic behind this game of bond purchases. This ensured retention of labor force which in turn guaranteed activity on the farm and continuous profits. I guess my grandfather risked the insolvency of bonds to the profits on the farm land.

Come to the present day central bankers like ECB and US Fed and they act in a similar manner, astonishing isn’t it? They know very well that bonds of Greece or Spain are absolute junk and still extend fresh credit to retain them in the European Union. The primary reason for this is to get export access to their markets, as they serve as a big market to the big European exporters like Germany and France.

The same scenario was one of the main causes of the 2008 economic crisis in USA. The US government was lending loans at very cheap rates (lesser than 2%), since they didn’t want the economic growth to be constrained and tax collection muted. They wanted more people buying cars, building houses, financing new ventures. All this was a source of income to the government in the form of tax. Whenever cheap and irrational credit is available, bubbles erupt. It could be the housing market or banks meltdown finally leading to a painful recession. Our central bankers never learn that irrational money supply is a disaster to the world.

At first glance, it appears as though the USA government, Germany or even my grandfather are being too benevolent. However, on close introspection we realize that they do this for their own interest; to prevent their own collapse and continue to sustain growth at any cost in the short term.

This seems to be a natural economic phenomenon. The same story repeats everywhere. The actors change, the times change and geography changes. You can as well replace ECB with US Fed or Japan central bank. Here US government does the bond buying program in spite of ever expanding debt repeatedly to boost the anemic US consumer with hope to collect more taxes.

Of course my grandfather died recently leaving the burden of bonds on my father. But I pity the future governments of US or Europe or Japan, more than my father.

- Sai Akhil S