Chart 10: Equity and bond yields moved  Chart 11: Negatively correlated in recent years  together during the 1990s  Source: Thomson Reuters Datastream  Source: Thomson Reuters Datastream  What might have caused this? In principle, the gap between the yields on equities and bonds depends positively on the risk premium and negatively on expected growth. So you’d expect this divergent pattern if investors revise down their central expectation of future growth, or if they see more risks (particularly downside risks) around that path. Collectively, you might refer to the sorts of things that benefit bonds and penalise equities as “pessimism” shocks. As I attempted to explain in a talk a couple of years ago, a rising downside skew to the perceived prospects for global growth could help to explain not just the divergence in yields but more specifically why it’s occurred via a decline in the real interest rate (Chart 12). 9  This is true if you think of the deficit in proportionate terms (i.e. relative to the value of the fund). It’s also true in absolute terms if a fund is in balance to begin with. It’s not true, however, of the absolute value of the deficit for a fund that begins in deficit. In that case, and measured in absolute terms, deficits would grow in response to a uniform rise in all prices.
We have been getting more and more dependent on electricity incrementally, in small steps, for many, many years now. So an electricity blackout now – in 2016 – would cause more harm and damage than it would have done say forty or fifty years ago, as many more devices, processes and productions are partially, or even fully, dependent on a continuous supply of electricity. And this continuous supply in turn incentivises the use of electricity as a tool of production and a source of power for various devices etc. This phenomenon of incrementally increasing dependence is also typical for financial services, or the banking sector as such, due both to state regulation (such as compulsory cashless transfers above certain thresholds) and to the markets and technological progress (such as credit cards, smooth money transfers, contactless payments etc.) All this is happening on-line in small steps, incrementally, and all this means banks might in bad times be seen as utilities, much less resolvable due to the complex services they provide, than in the past. And the complexity of the services of a utility is sometimes visible only very shortly before its potential collapse. So “utilities” providing products with incrementally increasing dependence will be able to exit the market in a much more complicated way, if at all. The same applies to the financial sector, all the more so if we go down the road to a lesscash economy (which is, of course, a slightly different concept than a cashless economy.