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Bill Gross' Latest Monthly Thoughts: "Pennies From Heaven" Or Can You Solve Debt With More Debt?

Tyler Durden's picture




 

Once again, Bill Gross proves he can think outside of the box better than most, with the following paragraph from his latest letter to clients: "the investment question du jour should be “can you solve a debt crisis with more debt?” Penny or no penny. Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique “EFSF” which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrabble with the 10-point “Q” letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier: As long as these policies generate growth."..."My original question – Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels. The Rogoff/Reinhart biblical parallel of seven years of fat followed by seven years of lean is not likely to be disproven in this cycle. The only missing input to the equation would seem to be how many years of fat did we actually experience? More than seven, I would suggest." And that, dear readers, is the bottom line: put otherwise, we have experienced 30 years of deviation from the mean courtesy of the biggest, and most artificial in history, cheap debt-inspired period of global "growth." And we are due for the mother of all mean reversions when the central planners finally realize their methods to defeat this simplest of methemaical concepts, have failed. 

Read on:

Pennies From heaven (link)

  • Once interest rates inch close to zero and discounted future cash flows are elevated in price, it’s difficult to generate much more return if economic growth doesn’t follow. 
  • Equity markets should be dominated by dividend yields and the return of capital via share buybacks, as opposed to growth.
  • In fixed income assets, we suggest that portfolios should avoid longer dated issues where inflation premiums dominate performance.

Ranking right up there with the myths about Santa Claus and the tooth fairy is the legend that pennies fall from heaven. This can’t be true, a priori, because God wouldn’t save pennies – nobody does! I know this for a fact because every weekend when Sue and I walk the neighborhood there is a fresh supply just waiting to be picked up on the blacktop. Here a penny, there a penny, everywhere a penny penny. Perhaps, I figure, it rained copper last night instead of H2O but no, they’re just on the street, lying there like a bunch of cigarette butts that someone obviously didn’t want to bother with. I will. As a matter of fact Sue and I compete for them. “Just think,” she said after beating me to the first on a three penny walk the other day, “there might be twenty or thirty thousand of these just lying around the street in this country right now. Think of all the good luck someone could be having.” And that of course is why someone should believe in pennies instead of the tooth fairy. They bring good luck: more than horseshoes, four-leaf clovers, or even betting on birthdates when you’re playing Lotto. Very, very lucky!

?There’s a theory that your luck depends on whether the penny is found heads or tails up. I’ve never been able to actually correlate that statistically. The competition is so fierce between Sue and I that the position of the penny goes unobserved as we push each other out of the way to be the official finder and therefore dispenser of the day’s good luck. When Sue gets there first she rather smugly hands the penny to me for safe keeping – her shorts having no pockets and all. I accept it reluctantly, all the while scouring the area for what might have been a “shower” of copperheads from some nonbeliever the night before.

This brings up an interesting question. If someone throws away a penny, is it bad luck? I’m not sure but I’m not risking it in any case. Those “Give a Penny, Take a Penny” containers near your local merchant’s cash register should be totally avoided. Giving a penny comes so close to throwing away a penny on the street that it ranks right up there with black cats, cracked mirrors and walking under ladders. In addition to pennies, I have advice on nickels, dimes and quarters that you might find lying along the road. Don’t touch ‘em. First and foremost, they don’t bring you any luck, and second of all they have billions of germs all over them. I’ve never been keen on cooties in any form or fashion. I might risk it for pennies, but I’m not about to pick up quarters no matter how profitable. Besides, how could any of you think that silver coated coins would be lying in the street in the first place? According to the efficient market theory, someone must already have picked them up. Find and save pennies. Very…very lucky!

Speaking of luck, the investment question du jour should be “can you solve a debt crisis with more debt?” Penny or no penny. Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique “EFSF” which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrabble with the 10-point “Q” letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier:

As long as these policies generate growth.

Growth is the elixir that seems to make every ache, pain or serious ailment go away. Sovereign debt too high? Just grow your way out of it. Unemployment rates hitting historical peaks? Growth produces jobs. Stock markets depressed? Nothing a lot of growth wouldn’t cure. But growth is the commodity that the world is short of at the moment, as shown in Chart 1. No country has enough of it – not even China – and many of the developed countries (specifically in Euroland) seem to be shrinking into recession.

The lack of growth, as explained in prior Outlooks over the past few years, is structural as opposed to cyclical, and therefore relatively immune to interest rate or consumption stimulative fiscal policies. 1) Globalization, 2) technological innovation, and 3) an aging global demographic have all combined to dampen policy adjustment post Lehman and will inexorably continue to work their black magic going forward. To defeat this misunderstood structural voodoo, countries would have to mint pennies by the billions, pretend to lose them, and then incredibly find them strewn all across their city streets like some global Easter egg hunt. Not gonna happen.

The situation, of course, is compounded now by high debt levels and government spending that always used to restart capitalism’s private engine. However, as economists Rogoff & Reinhart have shown in their historic text, This Time Is Different, sovereign debt at 80-90% of GDP acts as a barrier to growth. Because debt service and interest rate spreads start to rise at these debt levels, a greater and greater percentage of a nation’s output must necessarily be diverted to creditors who in turn become leery of reinvesting in a slowing economy. The virtuous circle becomes vicious in its reflexive counter reaction, spiraling into a debt/liquidity trap á la Japan’s lost decades if not stopped in time.

Halting the downward maelstrom is what current monetary policy is attempting to accomplish. With fiscal policy in most developed countries incredibly restrictive instead of stimulative, central banks have assumed the helm on their own – but it has been a long and relatively futile watch. Structural growth problems in developed economies cannot be solved by a magic penny or a magic trillion dollar bill, for that matter. If (1) globalization is precluding the hiring of domestic labor due to cheaper alternatives in developing countries, then rock-bottom yields can do little to change the minds of corporate decision makers. If (2) technological innovation is destroying retail book and record stores, as well as theaters and retail shopping centers nationwide due to online retailers, then what do low cap rates matter to Macy’s or Walmart in terms of future store expansion? If (3) U.S. and Euroland boomers are beginning to retire or at least plan more seriously for retirement, why will lower interest rates cause them to spend more? As a matter of fact, savers will have to save more just to replicate their expected retirement income from bank CDs or Treasuries that used to yield 5% and now offer something close to nothing.

My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels. The Rogoff/Reinhart biblical parallel of seven years of fat followed by seven years of lean is not likely to be disproven in this cycle. The only missing input to the equation would seem to be how many years of fat did we actually experience? More than seven, I would suggest.

The investment implications are numerous although far from certain. Equity markets should be dominated by dividend yields and the return of capital via share buybacks, as opposed to growth. A market P/E ratio of 15X is actually a 6.5% earnings yield – not a bad return compared to 2% 10-year Treasuries, but actually a little bit short when placed against Baa and High Yield corporate bonds, which represent a senior claim against earnings in a rather uncertain global economic environment.

Despite 2% 10-year Treasuries, low economic growth rates are usually supportive of high quality sovereign debt and they may likely continue to be as long as QEs continue. Investors should be mindful of the global bond market’s most recent historical example of sovereign debt returns in a slow/no growth environment – Japanese JGBs. Even after yields reached relative rock bottom by 2003, bond returns managed to outpace inflation as holders of 5–10 year maturities “rolled down”1 a relatively steep yield curve and added capital gains to a relatively paltry interest coupon. The same strategy can be conceptualized in the United States. A seemingly anorexic 1.00% 5-year Treasury yield would be turned into a 2% annual return by allowing it to “age” for 12 months and become a .75% 4-year with an assumed attendant 1% upward price movement. Sort of like finding a lucky penny – but dependent of course on a Fed policy that shows no sign of moving off the 25 basis point goal line.

One should not stray too far, however into Japanese la-la bond land. Developed economies – the U.S. included – have experienced 3%+ inflation in the midst of a New Normal economy where expectations 12 months ago would have been for far less. Sovereign monetary and fiscal policies, while generating undersized real growth, have managed to produce disproportionately large inflation. While “output gaps” represented by high unemployment might normally contain the rise, it has not done so to date. The answer might be found in the narrow output gap in developing economies and the transmittal of their inflation back into the U.S., U.K. and Euroland.

My point on the bond side is not to discourage the ownership of fixed income assets despite the relatively low expected returns, but to suggest that portfolios should avoid longer dated issues where inflation premiums dominate performance. Despite the Fed’s twist program, which promises to absorb almost all 20-30 year supply over the next 6 months, future QE programs hinted at by Yellen and Dudley – two of the three Fed Musketeers – are likely to push long-term yields higher because their policy objective is 2%+ inflation. Investors should consider migrating to the relatively safe haven of 1–10 year maturities offering “rolldown” total returns of 2–3% with far less duration risk. In addition, Agency mortgages are back on the Fed’s menu and may be a featured “special” in months to come.

In sum, with both earnings and bond yields near historic lows as a result of a lack of real growth in developed economies, investors will need to find lots of pennies to produce asset returns much above 5% in bonds or equities. Pension funds, Washington politicians, and indeed Main Street investors are likely expecting much more. One of the big problems of an asset-based economy is that once interest rates inch close to zero and discounted future cash flows are elevated in price, it’s difficult to generate much more if economic growth doesn’t follow. Such appears to be the case today. Unlucky…very, very unlucky.

 

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Mon, 10/31/2011 - 08:19 | 1828009 Irish66
Irish66's picture

Bill no longer friends with the gov't

Mon, 10/31/2011 - 08:26 | 1828020 vast-dom
vast-dom's picture

not after he shorted the bond markets to no avail. and even if his timing was off, he was, in essence, correct. bonds will crap out hard in due time. 

Mon, 10/31/2011 - 09:22 | 1828127 junkyardjack
junkyardjack's picture

Isn't he long now?

Mon, 10/31/2011 - 09:09 | 1828090 High Plains Drifter
High Plains Drifter's picture

does our dear friend bill, have massive amounts of physical gold and silver stashed away in his huge mansion built and paid for mind you, with the filthy lucre he derived from his "investment advice" for the  many baby boomer bond holders who he "helps"  during the years of plenty. this pig makes me sick. hang his balding ass with the rest of them..........

Mon, 10/31/2011 - 10:21 | 1828277 RockyRacoon
RockyRacoon's picture

So, where was Bill while all this was building?   Now that the turds are being impacted by various blades, he is so insightful of past events.   Wake me when he predicts the next 10 years.

Yawn.....

Mon, 10/31/2011 - 08:19 | 1828011 paarsons
paarsons's picture

Good Citizens of Metropolis!

Here's my advice!

The sky is falling, and we must run to the hills.

http://fucklloydblankfein.blogspot.com

Mon, 10/31/2011 - 08:21 | 1828013 Tense INDIAN
Tense INDIAN's picture

this one NAILED the current RALLY :::---

 

http://slopeofhope.com/2011/10/interesting-spytlt-ratio.html

Mon, 10/31/2011 - 08:21 | 1828014 Eurodollar
Eurodollar's picture

Does anyone have a set of charts or links to charts showing real for the G20 gdp adjusted down for debt driven consumption? If so I would be very happy to have them :)

Mon, 10/31/2011 - 09:15 | 1828106 High Plains Drifter
High Plains Drifter's picture

speaking of g20. we are now in world governance and have been since 2009 , according to the president of the european council, mr. herman van rompuy....

We are living through exceptionally difficult times. Financial crisis and its dramatic impact on employment and budgets, the climate crisis which threatens our very survival — a period of anxiety, uncertainty, and lack of confidence. Yet these problems can be overcome, by a joint effort, in and between our countries. 2009 is also the first year of Global Governance with the establishment of the G-20 in the middle of financial crisis. The climate conference in Copenhagen is another step towards the Global Management of our Planet. Our mission, our presidency is one of hope, supported by acts, and by deeds.’ (press conference November 19, 2009)

http://youtube.com/watch?v=QEqFtVrAgSo

Mon, 10/31/2011 - 11:12 | 1828549 MachoMan
MachoMan's picture

So is China's dissent for real or just a proxy for other interests (theater)?  We really haven't heard dick about the whole carbon credits/global environmental control since they told everyone to piss off.

Mon, 10/31/2011 - 08:26 | 1828019 Cursive
Cursive's picture

Hyman Minsky already answered this question with a resounding no, but Larry Summers and a bunch of other Keynesian asshat economists didn't get the memo.  Keynes used to mock critics that "In the long run, we are all dead."   The long run is here and Mr. Minsky is knocking at the door with a fully load automatic.

Mon, 10/31/2011 - 08:34 | 1828037 GeneMarchbanks
GeneMarchbanks's picture

Solution: i)don't open the door. ii) Hope Minsky goes away.

Mon, 10/31/2011 - 09:17 | 1828112 High Plains Drifter
High Plains Drifter's picture

that will only work for maybe another year tops...

Mon, 10/31/2011 - 09:22 | 1828134 LawsofPhysics
LawsofPhysics's picture

Shoot Minsky from the roof or pay him in Gold to protect your ass.

Mon, 10/31/2011 - 08:27 | 1828022 The Axe
The Axe's picture

Only when the last Bear surrenders will the most magical of all markets kneel to the truth...In other words..Not yet..

Mon, 10/31/2011 - 08:33 | 1828038 woolybear1
woolybear1's picture

he could have said that in two paragraphs

Mon, 10/31/2011 - 08:37 | 1828043 Terminus C
Terminus C's picture

He could have said all that in two words:

Gold, bitchez!

Mon, 10/31/2011 - 08:38 | 1828047 wisefool
wisefool's picture

Yeah, but atleast he admittted it. "One should not stray too far, " is the opening statement of the 12th+ paragraph.

Mon, 10/31/2011 - 08:37 | 1828042 BadKiTTy
BadKiTTy's picture

........aaaaaand it's gone!
As much as we want to cling to old ideas (8% return on investments) there is simply a new realty we must adjust to. We go mad all at once but only regain our sanity one at a time. Denial, anger, bargaining........ We are still on the boundry of denial and anger.
I have watched my business contract 50% from the 2007 high, and this year expect a further hit. Expenses slashed to the bone so nowhere to go there ( profitability up last 2 years but under pressure now).
Smaller but more sane expectations rule the day for me now. Family, friends, health, the stuff you can't buy but is the only thing of value.

K@

Mon, 10/31/2011 - 09:30 | 1828155 LawsofPhysics
LawsofPhysics's picture

Amen.  I will only add that I have seem business increase a bit, but that is only because of contracts we still have going that were made prior to 2008.  For example, we are sending more and more of our soybeanns and cotton overseas.  We also do some contract work for agriculture-centered biotechs.

The big thing that has crushed my margins is energy.  Diesel fuel and the electricity for an number things (chicken houses, dairy cooling, etc.) has gone way up.  Over 100% for the electric bills.  Unfortunately, no solar-power tractors.  Not yet anyway.

Mon, 10/31/2011 - 11:31 | 1828617 vato poco
vato poco's picture

Poppycock. Oh sure, family, friends & health are nice, don't get me wrong. But they're hardly the "only things of value". Just off the top of my head, I can think of hookers and blow and fancy spinning rims on the Corolla (or "fuckmobile", in street parlance) that folks want bad, and will pay big bucks for. Ergo: value. Just because you can't buy happiness doesn't mean you can't lease it. Who would you rather spend the holidays with? Your unemployed overall-wearing dirtbag tweaker brother-in-law and his thieving white-trash reform-school devilspawn, ("their mama done r-u-n-n-d  o-f-f.")("I was wonderin' if'n you'd co-sign a note for a used mobile home, in the sperret of Christmas?"), or a cheerful, stunning 22-year-old stripper? Knowing damn well the stripper will cost you less in the end, & she won't ever ask you to bail her out on a meth-cookin' charge? If for no other reason than she don't know your real name?

I think what Gross is trying to say here is, 'When life sends you lemons, break out the Stoli and whip up some vodka lemonade.' Like in The Bible.

Mon, 10/31/2011 - 08:38 | 1828044 fonzanoon
fonzanoon's picture

Gross is schizophrenic. Everytime I see him on TV he is advocating more short term spending, additional stumulus and not cutting spending in the short term. Then he writes these colums and calls bullshit...on everything he seems to be advocating.

Mon, 10/31/2011 - 08:46 | 1828060 El Viejo
El Viejo's picture

Everyone is an investment genius during a bull market.

Mon, 10/31/2011 - 09:22 | 1828129 High Plains Drifter
High Plains Drifter's picture

its not going to work. everyone has seen his act and we know him. the men shall arrive soon at his doorstep to take him away for just trial and sentencing... no mea culpas will be allowed....

Mon, 10/31/2011 - 08:39 | 1828048 merizobeach
merizobeach's picture

Writing a story about pennies strikes me as about as pointless as saving them instead of throwing them into the street.

Mon, 10/31/2011 - 09:08 | 1828087 SheepDog-One
SheepDog-One's picture

Maybe Bill is Freudently slipping to us that he imagines a cup with pencils and pennies in the future.

Mon, 10/31/2011 - 09:24 | 1828138 High Plains Drifter
High Plains Drifter's picture

yeh maybe in his future if he is lucky, the asshole.....

Mon, 10/31/2011 - 08:42 | 1828052 ian807
ian807's picture

Seems to be creating growth in India and China. Just not in the countries where it's employed.

Mon, 10/31/2011 - 08:42 | 1828053 El Viejo
El Viejo's picture

Can you solve...?

Only if the payments are less and not more.

Mon, 10/31/2011 - 08:52 | 1828065 MFL8240
MFL8240's picture

Interesting article coming from an insider!  Shouldnt matter to you Bill because no matter what the rest of us do, you have the contacts to always remain a few steps ahead of the Fed and make money on what they will do.  That is one of the benifits you have as an insider, we dont have that same benifit we must rely on what pile of shit they dish us each day.

Mon, 10/31/2011 - 09:08 | 1828088 LawsofPhysics
LawsofPhysics's picture

My take is that Bill is getting kicked to the curb because he keeps pointing out the obvious moral hazards and fraud and because he simply doesn't want to play along anymore.

Mon, 10/31/2011 - 10:08 | 1828237 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Buy his fund if you think he has "special" knowledge.

Mon, 10/31/2011 - 08:54 | 1828066 xcehn
xcehn's picture

The establishment is demanding a miraculous recovery. The global economy will soon have its rude answer.

Mon, 10/31/2011 - 09:10 | 1828092 SheepDog-One
SheepDog-One's picture

What will the establishment do when they realize all theyve done is bankrupted the producers, till their penthouse patios for tomatoes? These people are fuked.

Mon, 10/31/2011 - 09:03 | 1828075 Old. No. 7
Old. No. 7's picture

Pennies aren't copper. One would think Mr. Gross knows that.

Mon, 10/31/2011 - 09:25 | 1828141 LawsofPhysics
LawsofPhysics's picture

Since Bill seems to be picking up pennies in front of a steam roller, I think he may have forgoten.

Mon, 10/31/2011 - 10:01 | 1828218 junkyardjack
junkyardjack's picture

They wouldn't be on the floor if they were

Mon, 10/31/2011 - 09:07 | 1828083 LawsofPhysics
LawsofPhysics's picture

Perhaps all these paper-pushing fucknuts should be asking themselves whether or not infinite growth on a finite world is possible or not.

 

Fucking idiots, the paper bonfire gets larger everyday.  Fine, crash the fucking system so we can find out exactly what the value of everyone's labor is.  Fucking morons.

Mon, 10/31/2011 - 09:07 | 1828084 monopoly
monopoly's picture

Good article by Pimco. We fit that bill. Older, still have a little disposable income and we are Not spending. No debt except a mortgage that we pay down every month and very cautious. Don't see us changing that for years. So we do not help growth in most any retail mall, unless you own a gun or gold shop.

Mon, 10/31/2011 - 09:09 | 1828091 midgetrannyporn
midgetrannyporn's picture

...portfolios should avoid longer dated issues where inflation premiums dominate performance.

translated: price volatility kicked my ass in 2011 bitchez!

Mon, 10/31/2011 - 09:16 | 1828109 Corn1945
Corn1945's picture

I wouldn't trust a word this guy says.

Mon, 10/31/2011 - 09:36 | 1828165 GCT
GCT's picture

Actually whatever we think of Bill Gross this article is spot on for a change.

Mon, 10/31/2011 - 10:07 | 1828230 gwar5
gwar5's picture

Yes, good article. Bill Gross stating the obvious -- that you can't pay off the debt by creating more debt. They all made money off the illusion and lies for decades, and now the mea culpa from Billionaire's Row in Newport Beach when they're old and ready to die.  Too little, too late.

 

Mon, 10/31/2011 - 09:44 | 1828181 Don Birnam
Don Birnam's picture

Would those be the zinc-alloy pennies, or the .950 copper pre-'82 pennies, Mr. Gross ? 

Mon, 10/31/2011 - 09:47 | 1828186 lolmao500
lolmao500's picture

What a way to run a railroad.

Who is John Galt?

Mon, 10/31/2011 - 09:50 | 1828198 Miss Expectations
Miss Expectations's picture

...sequential QEs with a twist.

I know what sequential means, I know what a twist is...but what the hell kind of liquor does one put in a QE?

Mon, 10/31/2011 - 10:00 | 1828216 gwar5
gwar5's picture

You know it's all a con game and civilization is doomed when a Harvard economist like Rogoff has finally "figured out" for us that you can't cure debt with more debt, and his Princeton PhD economist counterpart with the Nobel prize still bangs spoons on his high chair insisting that you can.

Every person with an eigth grade education could answer the above and has a better grasp of things than our cargo culting central planners. 

Example A:  "The more we spend, the richer we are! Yes, really!" -- Joe Biden, 2009


 

Mon, 10/31/2011 - 11:01 | 1828513 Cat On A Ledge
Cat On A Ledge's picture

And we are due for the mother of all mean reversions when the central planners finally realize their methods to defeat this simplest of methemaical concepts, have failed.

Methinks there's nothing mythical about mathematical!

Mon, 10/31/2011 - 11:38 | 1828641 Dr. Nancy
Dr. Nancy's picture

 

All that's happening is predictable, as there are 7 stages that any major economy goes through. Those who know how it works profit & massive wealth is transferred to them. You can see what one millionaire has to say about the 7 stages countries go through & how you can profit like the ultra-rich during these tough times.

His free video

"How To Create Incredible Wealth in Today's Economic Crisis"

is at:

http://theelevationgroup.net/presentation/register.php?a_aid=160667&a_bi...

Hope this info helps everyone as much as it has me.

Dr. Nancy

 

Mon, 10/31/2011 - 12:01 | 1828713 cranky-old-geezer
cranky-old-geezer's picture

 

 

Contrary to opinions of many here on ZH, these people aren't stupid at all. Their ridiculous projections of economic recovery and growth are a cover story for what's really happening:

a) massive looting of the people, and

b) preserving the value of existing debt paper.

If someone has maxed out their credit cards, the only reason to extend more credit is prevent them from defaulting and bankrupting, in order to preserve the value of the debt on banks' books and avoid having to write it off as a loss.

Every action since '08 has been done to avoid default and preserve the value of debt on banks' books. Loaning more money to insolvent governments is done prevent sovereign default and preserve the value of sovereign debt on banks' books.

How long can they keep doing it? As long as central banks can print currency.

Yes, they're steadily debasing those currencies along the way. Steadily stealing wealth from people using those currencies, which is the real goal of TARP and stimulus and LSAP and QE and other currency printing measures. Transferring wealth from the people to the banking sector.

But it only works when the value of debt paper held by banks is preserved, meaning more currency has to be printed and loaned to debtors to prevent default. This is what's happening in Greece and other PIIGS nations. This is what's happening in America.

If all the debtors suddenly declared force majure and defaulted, all that debt paper on banks' books would suddenly be worthless, instantly transferring that wealth from banks to debtors because banks no longer have a claim on it.

All that printed currency stays in circulation. It's never recovered and removed from circulation.

Debtors are the winners and banks are the losers.

The people at large never get their wealth back.

This is the Achilles heel of a debt-based paper currency system.   Banks benefit only as long as debtors don't default.

Mon, 10/31/2011 - 12:16 | 1828769 the grateful un...
the grateful unemployed's picture

really can you engineer earnings by borrowing money at ZIRP and buying your own shares? that is insane and corrupt, like the corn auction where the seller gives his brother in law money to bid up the price. then of course he ends up with a lot of his own corn, (or T bonds in this case) while concurrently fixing prices higher than where the market would price it.

soon enough you own most of your own product and the price is much higher than anyone is willing to pay. the only solution at that point (for public companies) is to go private, but in the meantime someone else has take market share away from you (unless of course everyone is playing the same game, think Central Bankers collusion)

the only solution for Central Bankers is to privatize government ( just as a Wall St firm will take itself private because it owns its own float at exaggerated prices) the surviving company of course a mere shell of itself but who knows, their books are closed to the publc, just as the public debt will be transferred to public and then finally private corporations, so that no one need know what their fiscal state really is.

the question is debt the answer to more debt assumes you have some view of the end game

this is why a Republican will be elected President this year, or why Obama will complete his turn to the right and be completely on board with the drive to privatize government (see phony Healthcare bill which mandates coverage) see the pullback in Iraq where there are still thousands of American paid mercenaries, which were the contractors killed in the latest attack in Afghanistan)

a huge corporate entity masquarading as public government is fascism simply.

its about more than debt.

 

 

Mon, 10/31/2011 - 16:31 | 1829698 falun bong
falun bong's picture

I think he's right, at the end of the first paragraph:

"methamatical"

That's the right term for it

Wed, 11/02/2011 - 14:05 | 1837696 existentialangster
existentialangster's picture

Geezer: GREAT point.  I think you're right -- TPTB really DO know what they're doing -- they have a debt-based Keynesian Ponzi scheme to uphold, after all.  They have to uphold the status quo because it makes them fabulously rich.  To hell with honest Americans or Europeans and the inevitable inflation that will kill our buying power as currency devaluation rages.  It is all about preserving the legitimacy of the debt on banks' books and making sure the banks stay engorged with those loan payments. 

I'm somewhat of a neophyte with economic issues, but as I understand it, that's why TARP was carried out, correct?  The subprime mortgages had no hope of being paid back because of all the defaults which made those loans worthless, so the Treasury bought those loans with our taxpayer money.  In essence, the Treasury was one big homeowner and paid off all the bad mortgages, correct?

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