Governments
It is the government that is most interesting when considering the falling cost of debt. There is a potential segway into discussions about MMT (Modern Monetary Theory) which we won’t explore here, but the idea of Government’s appropriate response to low rates is analogous to this theory; with interest rates so low, what is the impediment to ever greater government debt? After all Japan’s government debt is already at 240% of GDP, double that of most of the developed world.
We think further cuts to interest rates will facilitate more government spending, particularly in light of the declining deficits and the prevailing austerity of the last few years. This policy of parsimony is already fading with rising populism. Falling rates will only speed up the demise.