Friday, January 22, 2010

The Debt Monster May Threaten Governments More Than Corporations (free subscription) writes:

Investors (Ed.: have) more trust in companies than governments

CDS prices suggest that investors have less trust in government bonds than in corporate bonds, writes Der Standard. The iTraxx Europe index for 125 European companies is at 77.80bp, that is it costs $77800 to insure $10m in corporate bonds. By contrast, the respective European SovX Index for government bonds reached 83.90bp. This suggests that investors consider it more likely that euro area goverments go bust than European companies. The Greek CDS is currently at 350bp, Austria’s at 85.26bp.

Another writeup from Eurointelligence today explains:

FT Deutschland has an article according to which a growing number of market observers believe that the Greek government is very likely to run into financial difficulties. It quotes analysts as saying that the Greek government needs to raise new capital in the next three or four weeks merely to repay old debts. If this is not happening, the nervousness in financial markets is likely to increase proportionately. If the government announces a capital increases, but failed to raise the necessary funds, the situation would deteriorate dramatically, leading to default, or bailout.
(Note: this story only reflects views among analysts, but these views, correct or not, now seem to dominate market sentiment.)

In brief, the above is the reason why despite numerous misgivings, I have money in the stock market. Many companies are self-financing due to positive cash flow, and few governments are. And if one thinks of it, most of what modern Western governments do is transfer income from one pocket to another to allow the beneficiary of the transfer to purchase services from the private sector or in some cases from non-profits such as private universities. If government (at all levels) limited itself to providing for the national defense, public schools, a system of courts, public roads and other basic matters, it too could easily be self-financing through various user fees and tariffs. This was in fact the situation on the Federal level in the U. S. throughout significant parts of the 19th century. As late as about 1916, the total Federal debt was so small that John D. Rockefeller is said to have been able to have paid it off in full.

The major beneficiary of all the debt in society is the financial sector, that makes fees all over the place selling the debt and then endlessly creating line extensions either selling the debt or selling products based on the debt or the ability of the government to print money and therefore take on more and more debt.

Sometimes enough is simply enough, and we are at the "too much" point re debt. From a big picture systemic standpoint, the inmates are running the asylum.

Trying to stay sane in an insane world is a difficult challenge.

Copyright (C) Long Lake LLC 2010


  1. Simplification is the heart of analysis. Bankers have been allowed to create credit to far too large an extent. That credit has predictably, created asset bubbles. Also predictably, especially if an Austrian, these bubbles have deflated, causing problems for owners and debtors but debt is regarded as sacrosanct. So most of the problem falls on those owners. As this is causing so much misery, for so many, I fear that some, less morally evolved people who believe they were taken in by a Ponzi fraud will take it out on persons they deem reponsible....

    We must protect our bankers. Please start a petition to put them all in protective custody...... I'd sign.

  2. Well said, Fungus

    We need principal reductions and a general simplification of the debt structure.