Crisis Progress Report (4), by Robert Gore | STRAIGHT LINE LOGIC
This is an excerpt, the full article can be accessed via the link above.
Faltering, on-the-verge-of-contracting economies decrease the debt-servicing capabilities of those economies, and debt levels are rising. SLL has long hypothesized that there will come a day when over-indebted governments face the rising interest rates the government of Greece has already faced. That may be happening now, at least in the US and Japan, where rates have been rising, under the radar (it’s the last thing to which Washington, Wall Street, or Tokyo want to draw attention).
It may be just a blip, and as a trading vehicle only the most intrepid should jump aboard, but it bears close attention. Interest rates are a crucial variable that governments and central banks must control. Keep in mind that governments (including their central banking arms) have historically been “dumb money.” (Who can forget the British Treasury’s sale of gold from 1999 to 2002, at the bottom of the gold market?) A general rise in interest rates, and concomitant fall in bond prices, after years in which central banks have been buying huge amounts of bonds, would fit the “dumb money” historical pattern perfectly, and would inflict grievous losses on the central banks.
Faltering, on-the-verge-of-contracting economies decrease the debt-servicing capabilities of those economies, and debt levels are rising. SLL has long hypothesized that there will come a day when over-indebted governments face the rising interest rates the government of Greece has already faced. That may be happening now, at least in the US and Japan, where rates have been rising, under the radar (it’s the last thing to which Washington, Wall Street, or Tokyo want to draw attention).
It may be just a blip, and as a trading vehicle only the most intrepid should jump aboard, but it bears close attention. Interest rates are a crucial variable that governments and central banks must control. Keep in mind that governments (including their central banking arms) have historically been “dumb money.” (Who can forget the British Treasury’s sale of gold from 1999 to 2002, at the bottom of the gold market?) A general rise in interest rates, and concomitant fall in bond prices, after years in which central banks have been buying huge amounts of bonds, would fit the “dumb money” historical pattern perfectly, and would inflict grievous losses on the central banks.
My only minor nit is with the notion that central banks are focused on one asset class, in this case equities. Cental banks look at real estate, energy, consumer durables, raw materials, etc.
This is nothing compared to your main point that our financial system is designed to be awash in debt and people confuse that for consumption with debt for investment. We can't know when the borrowing will present as a mini-crisis of rising rates, possibly during a period of contraction.
The article describes it better.
That book is like a defense of national bank autonomy that you'd probably disagree with. He hints at having a huge admiration for Rand, almost implying they were intimate, but he doesn't go to deep into that.
One thing you and I probably both disagree with Greenspan on is debt. He says the amount of debt US consumers run up is a sign of the strength of our economy. Rational players, he says, go into enormous debt b/c they see the US economy is a cornucopia. I agree US institutions are good (could be better), but I think the consumer and gov't borrowing is just short-sightedness.
As for bank autonomy, if you're referring to central bank independence, I'm not for it because I'm not for central banks, for all the reasons Daniel Durand stated in The Golden Pinnacle (Chapter 27, Fools' Gold).