Code Red, Red Alert, It’s All Red – Borrowing Without Repaying

In a G Zero world, there is no leadership but one big vacuum.

When the Fed tells us that they do not exist for global good, people and countries start looking inwards.

“You have to remember that we are a legal creature of
Congress and that we only have a mandate to concern ourselves
with the interest of the United States,” Dennis Lockhart,
president of the Atlanta Fed, told Bloomberg Television’s
Michael McKee. “Other countries simply have to take that as a
reality and adjust to us if that’s something important for their

Look at the historic wide between the S&P and the DXY Index.

spx vs dxy historic wide

Whilst confidence in the USD is not at its all time low in Mar 2008, we are no where near the glory days of the USD.

In a G Zero world, it is everyone for themselves. Every leader is focused on their own needs than the big picture and the markets go into overdrive.

Well, Greenspan published a book, The Map and The Territory, last week which basically admitted he got it wrong and never saw the crisis coming.

It is a tribute mostly to animal spirits which tells us that economics is an art not a science and more a muddle through process, coined by John Maudlin.

John Maudlin is published a book Code Red, about a world with far too much debt that it cannot repay.

There are basically 3 options :
1. Default
2. Paying Down Debt Through Economic Growth
3. Eroding the Burden of Debt through Devaluation

The US deficit is shrinking albeit slowing but the rest of the world is borrowing. The “high yield” bond market is now estimated that $1.7 trillion.

Bloomberg estimates that high yield issuance in the US alone has doubled this year.

It does look like the only option is to devaluate our way out of it as central banks keep up the currency wars that is everything but in name. This is ingrained in our mindsets now that a dollar today is worth 2 tomorrow and why the mad rush into that extra property, leveraged stock and bond buying and a mad grab for assets that appear to be led by the chinese in almost every continent on Earth except on the isle of Japan.

When debt is due, there is always that rollover if by then your asset prices haven’t inflated to the extent that you can sell it to pay it down and keep the profits. Someone else will buy the asset at its inflated price and fund it with more debt and it goes on.

What will we end up with ?

Just a big load of debt and another load of very expensive assets.

Politically and socially, it is destabilising as more and more are excluded from the largesse. Further destabilisation comes from the fact that growth is not occurring  because it is easier to buy for profits than grow for profits.

Somehow, I think many of us think deep inside that this will end in tears. But Greenspan pointed out this interesting study about human nature.

” researchers asked a group of graduate students and staff members at the Harvard School of Public Health whether they would be happier earning $50,000 a year if their peers earned half that amount or $100,000 if their peers earned twice that amount; the majority chose the lower salary.”

And a young banker told me over lunch that he will nevertheless still buy that shoe box in London because bubbles take years to burst and he needs to bag that windfall.

To me, that is, like I said, Just a big load of debt and another load of very expensive assets and no one left to tell us what to do.