A report out overnight from the Bundesbank examines the impact of quantitative easing on the rate of interest German authorities pay to borrow money.

In 2007 the average rate for the government or a local authority to borrow was 4%, last year it was less than 2%. Over that period German authorities have “saved” €240bn in interest payments. Put it another way, that is €240bn of income investors have LOST out on as a result.

Bond prices globally have moved to ridiculously high levels as central banks manipulate the market and hoover up assets. Investors in all asset classes have traded lost long term income for short term capital gain. Unfortunately the history of most markets is that prices and yields normally move back toward longer term averages. As that happens who bears the losses? Well, not the government – it has locked in decade long low rates. Which leaves investors.

I’m a dyed in the wool capitalist, I believe passionately in regulated, free markets. I believe the system works best when the balance of risk and reward between borrowers and lenders is evenly spread. From 2001 to 2007 the balance tipped too far in favour of borrowers and we ended up with the global financial crisis as everyone “levered up”. We then spent 5 years trying to fix things with more regulation and capital controls. But since around 2012 we reverted to type. Hiding behind a smokescreen of “dis-inflation” (largely due to oversupply of commodities, where production was boosted by all the free money!) Central Banks continued to manipulate markets, boost asset prices and destroy long term value for investors by holding savings rates way below the rate of growth of G7 economies. Let us be clear – that boosted asset prices principally because borrowers had never had it so good. It disincentivised investment and innovation. It killed productivity. There is NO mystery behind that.

So if you intend buying an equity or a bond fund have a think about that. The German government has already made €240bn from your generosity. If and when prices reverse it is not they who will bear the losses.

A decade ago all the talk was of “debt socialisation” as the only means to get us out of the leveraged hole the financial and government sectors were in. Well, we need to WAKE UP people. Socialisation has happened. And if you are the one left holding the assets when the market turns, who is going to bail you out?

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