Global bond burn from Brexit may now force fiscal response

Wed Jul 6, 2016 2:03am EDT
 
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By Mike Dolan

LONDON (Reuters) - A slump in long-term interest rates since Britons voted to quit the European Union is the clearest financial market verdict on the global impact of 'Brexit' - yet another body blow to world growth that may now need a game-changing policy response.

With many governments now able to borrow for next to nothing for decades into the future, economists this week called on them to stop leaning on exhausted central banks and use record cheap borrowing costs to kickstart a revival of moribund private sector investment and at least try to reboot the world economy.

For many elected officials worried about their jobs, the big message from Brexit is that years of stagnating real wages for the bulk of the population has finally led to the sort of popular rejection of the status quo unthinkable only a decade ago.

While extraordinary central bank easing since the credit crash may well have prevented a more sudden and painful fracture with voters, critics argue that it just amplified many of the problems by reflating asset booms that only exaggerated wealth inequality on top of already yawning wage gaps.

EVAPORATING RATES

Yet the enduring legacy of years of zero and even sub-zero interest rates and extensive bond buying is that governments can now borrow a record low cost for decades - if only they were prepared to spend and invest the proceeds.

Worries about world growth, demographics and deflation didn't start and won't end with Brexit, of course, but the eye-popping slide in sovereign bond yields since the June 23 referendum is now alarming in what it says about the health of the world economy 10 or even 20 years into the future.   Continued...

 
A trader works on the floor of the New York Stock Exchange (NYSE)  in New York, U.S., July 5, 2016.  REUTERS/Lucas Jackson