The Revolt Against Absurdity

Credit default swaps insuring Greek debt rose in price yesterday to cover a 98 percent chance there will be a Greek default in the next five years.  But perhaps it will happen sooner.  Greece is playing games with its austerity targets and Germany’s had enough of their antics…

“‘Greece is ‘on a knife’s edge,’ German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on September 7 […],” reported Bloomberg. “If the government can’t meet the aid terms, ‘it’s up to Greece to figure out how to get financing without the euro zone’s help,’ he later said in a speech to parliament.”

Without Germany’s backing of another Greek bailout, a Greek default is imminent.  Should this happen things could get real ugly real quick for Europe’s biggest banks who extended credit to the Greek government.

One indicator Germany will be opting not to bail out Greece – again – is the anecdote they are making contingency plans to protect German banks should Greece fall short of meeting its austerity targets.  There’s also a nasty rumor floating around that Moody’s Investors Service may downgrade the credit rating of France’s largest banks – like BNP Paribas and Societe Generale – this week because of their Greek debt holdings.

No doubt, European banks are in way too deep.  At this point a Greek default could have a similar affect as Lehman’s crash in 2008 – with credit markets seizing up, resulting in a much larger financial crisis.  In the meantime, back here in the land of the free, U.S. government debt is more popular than a Pink’s Hollywood Hot Dog.  Investors are lining up down the street to get a piece of the action…

Failing to Think

Just when we thought yields on Ten Year Treasuries could not go any lower they did exactly that…they went lower.  After gawking at the absurdity last Tuesday as yields fell to 1.91 percent, we were greeted with an even greater shock on Friday when yields dropped to their knees and kissed the soil at 1.89 percent.

Obviously the debt hullabaloo in Europe had something to do with it.  After all, everyone knows that ‘U.S. Treasuries are the safest investment in the world.’  When there’s market uncertainty in the world everyone knows you pile into U.S. Treasuries.  But, as we elaborated last week, just because everyone knows this to be true, does not mean that it is so.

Most people don’t find out what is happening until after it has happened.  Even then, they don’t quite get it at first.  When they finally comprehend what has happened they look back and, in hindsight, wonder how they didn’t see it.

Of course, they missed it to begin with because they were looking in the rearview mirror. They were seeing what has been and projecting it forward assuming it’s what will be. “Yesterday wasn’t all that different than today,” they may say.  “Tomorrow will be almost like today.”

Most of the time, they are mostly right.  But, regardless, they go about their day without doing several very important things.  Specifically, they forget to open their eyes and look around…and they fail to think. Here’s what we mean…

The Revolt Against Absurdity

U.S. government stewardship of the nation’s finances over the last 50 years has been profligate.  Politicians have paid current promises with money borrowed from the future. Overtime, all this borrowing has gotten farther and farther ahead of what the economy, and tax receipts, can support.  Now it’s finally time to pay up.  Yet, to do so, requires further borrowing.

For over a half century the U.S. Treasury has taken its unique and advantageous position as issuer of the world’s reserve currency and squandered it.  In the process, through making available an abundance of cheap money, they’ve enticed the populace to live beyond their means.  In doing so, a monstrous mountain of debt has been erected on a foundation of paper money.  If just one boulder comes loose the whole thing could cascade down in a ruinous avalanche.

The debt mountain will continue to build until credit markets ultimately blow the top off. Investors will eventually recognize that U.S. Treasuries are no longer the safest investment in the world.  International demand will decline.  The Federal Reserve will be the only buyer left in town…perpetuating the demise.  Interest rates will rapidly rise and America’s standard of living will fall.

In his economic treatise, “Human Action,” economist Ludwig von Mises described the rise of socialism in the late 19th century as “the revolt against reason.”  These days a different, albeit less grave, revolt is underway.

Last Tuesday, Ten Year Treasury yields fell to the absurdly low mark of 1.91 percent. Nonetheless, on Friday investors raised their pitchforks into the air and revolted against absurdity.  In an act of bold defiance they bid yields down even further…all the way to 1.89 percent.  Soon they’ll be paying the treasury for their debt.


MN Gordon
for Economic Prism

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