What happened when the insolvent government of the UK in the 1820s did the same?
This can give us important insights, as Mr. Gundlach is expecting exactly that for the US:
a probable coupon cut on US Treasuries.
https://www.youtube.com/watch?v=w70pXOAtxE0
In the historical episode described, the UK government—burdened by excessive debt, largely as a result of fighting the Napoleonic Wars—chose to reduce the coupon on its obligations. What is interesting is that it resulted in a similar outcome to the current debasement policies of the US, as the US central bank is in a process of deficit monetization.
Investors, dissatisfied with declining real yields, began reallocating in search of better returns. This shift triggered a broad-based expansion in risk-taking. Capital flowed into increasingly speculative ventures, many of which lacked solid fundamentals.
Juglar notes that, as a result of this reduction in real yield (using a reduction of coupon instead of debt monetization and deficit monetization, as is the case currently in the US):
In 1) people were yield-seeking.
And that is exactly what the BIS described as “yield seeking as a result of yield repression.”
In 2) a prosperity a lot more apparent than real ensued.
(Wealth effect of the stock market for the 10% responsible for 50% of consumption—does it ring a bell for anyone?)
And plenty of Minsky garbage projects got funding which should not have been. “Whatever absurd.”
Those projects might have been as quoted in the text.
Remember the recent SPAC boom?
In 3) bad paper enters the circulation. In other words, this excessive speculation and yield-seeking give rise to absurd projects getting funding.