I underestimated the extent to which the new government-bank combination would allow banks to crank out earnings. But none of this has much to do with the rest of the economy. The banking system is financing about three-quarters of the $1.6 trillion Federal deficit, lending to the government at 1% for 2-year notes, with virtually no capital coverage required. Now, that’s an efficient use of bank capital, namely zero to finance Treasury securities on the carry trade.
If you've ever wondered who in the world is buying all our debt, I think this article answers that question, at least IMO it does.
I would expect the overall long term trend towards miniscule rates to continue, the FED is in a box now, if it ever raises rates the end of the financial universe would occur, as all these banks would have to unwind this trade and sell off vast seas of debt driving rates through the roof overnight.
The FED is not going to do that, the central bank in Japan did nothing for a decade but threaten to raise rates, they never materially did.
When a bank can borrow at 0-.5% and then turn around and buy a Treasury yielding 2.5% and then leverage this up many many times the returns are huge.
They will just keep doing this and thus they will lend to the government before the public because it is safe and without risk.
It's a trap you can't get back out of but it does let governments finance their debt cheaply and it punishes savers.
Literally the bubble in this is epic, trillions of treasuries that could not have otherwise been purchased are purchased this way, causing reality in funding the goverment to dislocate, it appears that this will never end but that's only because essentially it can't, if it ever is forced to end through a vicious spike in rates which drive down the value of bonds which then force the banks to start selling treasuries to an illuquid market it all detonates at once.
I don't know what could cause that and in Japan nothing has so far but this is going to be the last bubble, dosen't say it won't last a very long time it did in Japan but this is it, no more bubbles for a long time after this one as it will be the bubble to end all bubbles.