Watch out for the sell-off by long-term bondholders Ruchir Sharma (“There is no easy escape from the global debt trap”, Opinion, November 22) is certainly correct in asserting that the world is stuck in a debt trap that makes it difficult for central banks to raise their policy interest rates.
However, he is likely mistaken in thinking that this makes it rational for long-term interest rates to remain low.
If central banks prove reluctant to raise their interest rates for fear of bursting asset price and debt bubbles, they are in danger of allowing interest rates to become more negative in real terms than they are today. That in turn would risk an acceleration in inflation from today’s already uncomfortably high levels.
At some stage, one would think that holders of long-term bonds will remember that a time-honoured way for governments to deal with their debt problems is to inflate their way out of those problems.
When markets do remember, they will start selling long-term bonds and force long-term interest rates higher.
Desmond Lachman
American Enterprise Institute
Washington, DC, US
Letter: Watch out for the sell-off by long-term bondholders
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