Opinion: The biggest bubble of all time | Opinion | DW | 15.06.2016
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Opinion: The biggest bubble of all time

Whoever lends Germany money pays a price. The price of German debt has sunk past rock bottom - and with that, the markets have reached new heights of absurdity. This will end badly, warns DW's Henrik Böhme.

German 10-year bonds: a classic among the bonds of the world. Whoever invested in them towards the start of the 1980s was rewarded with fat yields of over 10 percent annually.

But those days are over. Earnings have been falling for three and a half decades, and reached basement levels this week. The yield on Germany's benchmark 10-year debt slipped into negative territory.

Welcome to Absurdia

That means Germany now belongs to that club of countries where expanding debt is rewarded. But that's all not really new.

As early as four years ago, DW published a much-read article on this undesirable development. Cheap money is a hallmark of the financial crisis of 2009 - its deleterious effects were already starting to take hold then.

Then, in the summer of 2012, European Central Bank chief Mario Draghi took it a step further when he promised that "whatever it takes" would be done in order to save the euro, and opened the taps all the way.

The biggest expropriation of ordinary people's savings in recent history was underway.

The ECB is partially responsible

When even 10-year investments have no returns, then it would have to be clear to the last observer that something has gone terribly amiss on the financial markets. These bonds are the most important instrument to finance the German state – they make up practically half of German public debt.

Boehme Henrik Kommentarbild App

Senior DW business editor Henrik Böhme

But the investment crisis has grown to such proportions that investors who want to at least park their money securely have had to swallow a bitter pill. A loss-making investment! Who would make one voluntarily? Right, no one. None of this has anything to do with sense or logic anymore.

A lot had to come together to make this absurd development a reality. But the nail on the coffin was the ECB's bond-buying program. The ECB has been buying government debt for around 19 billion euros ($21.3 billion) a month.

The artificially created demand pushed the bond price upwards - and revenues shrank accordingly. Should external shocks be added, such as, say, Brexit fears, then they serve to fan the flames.

The fear of a bubble

This is all unlikely to have a happy ending. The retirement funds of millions in Germany - and around the world - are being chased up the chimney of the ECB and other central banks with an ultra-loose monetary policy.

Half of the world is sitting on bonds that no longer yield any interest. But a world without interest cannot possibly function when capital, interest, and compound interest are the main pillars of our economic system.

The financial markets have been destroyed, as has the trust of the people. It's too bad that when interest rates eventually do begin to climb again, we could actually be in for a really big bang. Bond prices would drop sharply and trigger a sell-off across the board. When the bubble bursts, investors should take cover - or be somewhere far away.

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