The Myth Of Risk Free Government Bonds

Bruce Krastings at the Zero Hedge has an interesting story to tell.

It's essentially about the sordid fate of Hungary's bearer bonds of 1924.

"Fifty years later the $500 of principal and the $1,250 of accrued interest were worth $40.", says Mr. Krastings.

Read the rest here

Yet the global banking system have been designed to hold government bonds as risk free assets and core holdings on their balance sheets. This bias towards "risk-free" government bonds effectively translates to subsidies to governments.

As Cato's Mark Calabria explains,

``Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category. For the highest risk assets, like corporate bonds, banks are required to hold 8%. Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital. So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt. Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class. Fannie and Freddie debt required holding only 1.6% capital. Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both." (bold emphasis added)

So unless we see a change in the mandated treatment of government bonds, which implies that subsidies to governments will need to be slashed, we will only keep jumping from one crisis to another, as shown in the chart below from the World Bank, where the incidences of banking crisis has ballooned post-Bretton Woods US dollar-gold standard.

In short, crisis are products of the inflationary central banking based-fiat money standard.

As Ludwig von Mises reminds us, ``It is always an inflationist policy, not economic conditions, which bring about the monetary depreciation. The evil is philosophical in character."