The Global Debt Binge Is Worse Than You Imagined

Today, we plunge into the sublime. 

That’s right: We are leaving the ridiculous behind. Instead, it’s headfirst into the dark pool of things we will never understand and probably never should try. 

First, we pause to take note of the latest debt binge. Reports Bloomberg: 

Just when debt-addicted American companies were starting to worry that Federal Reserve Chair Janet Yellen was going to take their proverbial punch bowl away, along came Mario Draghi. 

‘The European Central Bank president has made borrowing so cheap in the region that foreign corporations are selling record amounts of debt. Forget the deeper, bigger US corporate-bond market. Borrowing in euro is all the rage these days because it’s about 2 percentage points less expensive to do so. 

About 65% of the record 60 billion euro of investment-grade bonds sold in March came from overseas companies, according to a March 27 Bank of America report. And a lot of those sellers are based in the US. […] 

The trend comes down to basic math. 

Yields on investment-grade bonds in Europe have fallen to 0.99%, compared with 2.9% on those in the US, according to Bank of America Merrill Lynch index data. 

Like all borrowing binges, this one is likely to end badly…

Poor bankruptcy lawyers

Last week, we looked at the glass half-empty — at the fall off in new start-up businesses in America. 

Today, we look at the glass bone dry! 

Yes, for every business not started in America, there is at least one that also doesn’t go broke. In 2014, the number of US corporate bankruptcies dropped to less than half the number in 2009. 

The poor bankruptcy lawyers! 

Imagine them sitting in their offices, with spiders spinning cobwebs in their doorways. Lonely, bored…on edge of desperation. 

But whence comes this big drop in bankruptcy rates? Why can’t businesses go broke like they used to? And how come there are so few new business start-ups? 

Look no further than Yellen, Draghi et al. Thanks to them, borrowers can score money at less than 1% interest from apparently compos mentis lenders. 

Or even more into the realm of the sublime, imagine you are borrowing at negative interest rates. JPMorgan Chase says there is as much as $3.7 trillion worth of debt outstanding for which the lender gets no more than a poke in the eye.

Dead wood

We pose the question not as a financial matter, but as a philosophical one. 

The world works (the financial world certainly and maybe the rest of the world, too) by rewarding effort, self-discipline and forbearance…while punishing error, sloth and impatience. 

These verities are written down somewhere: 

The person who works steals a march on the layabout. 

The person who takes the time to study and learn is able to do what the ignoramus cannot. 

The person who saves his money can lend it out, thus earning more money. 

But what if the saver is punished…what if, for his trouble, he earns a negative yield?

Or look at the other side…look at the borrower. 

Imagine a restaurateur whose cuisine is so repulsive and whose kitchen is so dirty that diners regularly need to be rushed to the hospital to have their stomachs pumped. 

He might borrow money to set up his restaurant, but in a normal world he would soon be unable to pay the interest on his loan. He would default and be out of business. Diners would be spared. 

But imagine if he could borrow below the rate of inflation

The worse his business did the more he’d need to borrow. And the more he borrowed, the more money he’d make! 

When would he default on his loan? When would he be forced out of business? 

Hell would close for business before he does. 

In what universe does this work? 

‘Creative destruction’ was the term used by Austrian-American economist Joseph Schumpeter to describe how a healthy capitalist system works. 

It clears out the deadwood from time to time by destroying businesses that can’t make a profit. 

Now, thanks to Mario Draghi, the wood just gets deader. 


Bill Bonner,
for the Markets and Money Australia

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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