The First Principle of Debt
The purpose of adjusting interest rates is generally to increase good debt while reducing bad debt. When interest rates are too high, good debt is suppressed, so the policy interest rate should be lowered to stimulate borrowing; when interest rates are too low, everyone tends to take out loans, which can easily lead to bad debt, so the policy interest rate should be raised. This optimal point, which resembles a convex function, can be defined as the "natural interest rate," around which the policy interest rate fluctuates.Author: Willy, Beihu
This article is submitted and does not represent the views of ChainCatcher, nor does it constitute investment advice.
Price is a facade; the underlying logic is the behavior of market participants. It is best to avoid simplifying behavioral logic using the mathematical correlation between facades. Participants' tendencies are stronger than the certainty of random walks, and the driving factors are deep first principles.
First, when measuring private sector debt, the government distinguishes between "good debt" and "bad debt" as a basis for policy interest rate decisions. Short-term interest rates have a better correlation with policy interest rates.
If a company has profitability and borrows for development, generating income and profits in the future, this debt is considered "good debt," which does not affect the company's credit and may even enhance it.
Only when a company's income or profitability declines does excessive debt make its financial situation more vulnerable. Further borrowing that fails to generate cash flow means the company has lost its profitability; at this point, the debt becomes "bad debt," significantly weakening the company's credit.
Due to the dual nature of debt, when the leverage of the corporate sector and the household sector reaches a certain level, especially when bad debt exceeds good debt, the stimulative effect of monetary and fiscal policies on the corporate or household sectors becomes ineffective.
Witnessing the Countercurrent by Fu Peng
The purpose of adjusting interest rates is generally to increase good debt while reducing bad debt. When interest rates are too high, good debt is suppressed, so the policy interest rate should be lowered to stimulate borrowing; when interest rates are too low, everyone borrows, which can easily lead to bad debt, so the policy interest rate should be raised. This optimal point, resembling a convex function, can be defined as the "natural interest rate," around which the policy interest rate fluctuates.
This is the government's perspective on the private sector.
Of course, there is also a private perspective on government debt, as "good debt/bad debt" also applies to the government sector.
Second, if the deficit is too high, the market worries about an increase in government bad debt and will not buy bonds, leading to rising yields. Long-term interest rates reflect the market's judgment on whether government debt is indeed good debt.
- The story of China is that the natural interest rate is declining, but funds still pursue returns (still seeking good debt), resulting in an asset shortage.
- The story of Japan is that the natural interest rate is too low, and funds have given up chasing bond market returns (lying flat), making government bonds completely unattractive, forcing the central bank to buy them itself.
- The story of the United States is that AI may have raised the natural interest rate, while the market is concerned about an increase in government bad debt.
