Let’s talk about debt.
Much like sex, it comes in all sorts of forms and flavors—sovereign, student loans (an area of personal expertise), payday loans, mortgages, credit card, inter-bank, and so on and so on. Unlike sex, however, very little good comes out of debt. To be sure, some people think it’s a fucking blast, namely those lenders whose pockets remain lined with the legitimate gains gleaned from those happy to pay the vig on the loan that got them through school or helped them own their first home or car. That’s just rosy.
Legitimate lending practices are boring as hell, the mundane seeping off of its very mention like sweat on a middle-aged branch manager’s brow when discussing CD rates. Zzzzzzzzzzzzzzzzz. Massive swindles, on the other hand, are far more fun to poke, prod, and spleen-vent about—and it just so happens that such shenanigans are on prominent display in the world of finance. Let’s take a plunge, shall we?
Sovereign debt is a topic that this blog has addressed previously; and it’s time again to revisit the subject. While the inevitable Greek (and Irish. And Portuguese.) march to default continues in spite of the EU’s frantic efforts to avoid such perceived humiliation at the hands of bond holders (talk about missing the point), the bond vultures have picked up the scent of good-ol’ USDA Grade AAA American debt as the next possible unpaid liability. Now, it is no secret that the American debt outlook is less than rosy—a brutal recession, unabated defense spending, and a dysfunctional health care system suffering from high inflation will do that to any country. The reason cited by Standard and Poors for a possible future downgrade to AA, however, was not a reflection of these economic challenges but ratherr a pessimism that the American political system could actually come to terms with this set of problems. This is a far more disturbing conclusion to draw; and while credit rating agencies may be politicized in and of themselves, the fact that the federal government is paralyzed with infighting that has been exacerbated by a widening ideological gap between Democrats and Republicans bodes ill for both the US and its creditors (Here’s looking at you, China).
Contrast (and compare) this situation with what’s occurring in Greece, where austerity budgets and strict adherence to the IMF-prescribed formula has only led to the further retrenchment of bond holder’s position that the Greek debt will be impossible to pay off without some sort of debt restructuring, i.e. bankruptcy for nation-states. 10 year Greek treasury notes stand (as of April 21) at 14%. If Greece wants to borrow money to pay for its government spending, it has to pay 14% interest per year over 10 years. Loan sharks don’t charge that much (I’m serious, they don’t). Of course, this means that Greece can’t borrow, as there are no loan sharks (not even Goldman Sachs) who can finance entire governments on credit—yet. Therefore, Greece–no matter how the EEC/EU cabal of grossness wishes for them to play the extend and pretend game on the backs of Greek citizens who probably never received the government services they are now supposedly being deprived of through these cuts in the first place— must default. It’s game over, and it’s been game over for a while. Even PM Papandreou (though he may protest otherwise for appearances sake) understands that there’s no way out, but the bureaucrats at the EEC, EU, World Bank, and IMF who fear the erosion of their legitimacy (maybe not the latter two—do a Google search of ‘Jeffrey Sachs Russia’ to see what I mean) are not quite ready to embrace defeat. It’d be pitiable, really, if they weren’t so odious about it.
The following, save perhaps the numbers quoted, holds true a year after the fact. Taking on a recession is not a panacea, and Hugh Hendry (uncharacteristically) failed to recognize that such a purge could create conditions that would extend the short, sharp downward spike in the global economy into a longer and far more harmful decline. The ‘champagne socialists’ barb has never been more appropriate, though. When a hedge fund manager with a chip on his shoulder manages to make a purported representative of the popular interest look so out of touch, there’s a fundamental disconnect that hums in the background and eats away at one’s conscience: