Gold News

Absurd Yet Persistent Debt Policies

Using borrowed money to facilitate yet more borrowing...

WHAT A web we weave when we spend money we don't have, writes Dan Denning for the Daily Reckoning Australia.

We spend it because we think we'll be able to pay it back later. Or, in the case of government debt, because it can make someone pay it back later through tax hikes. But the world is still full of bills that may never be paid. And if those bills (or bonds) represent assets on someone's balance sheet, a lot of portfolios are going to take a hiding.

Stock markets are currently somewhere between Dr Jekyll and Mr Hyde. The economic data emanating from the US and Europe isn't good enough for anyone to get excited. And central bankers are expressing the view, for now, that there will be no more vodka in the punch bowl. This presents a problem for fund managers whose job it is to buy stocks. 

You are probably as tired of reading about other people's debts as we are writing about them. But the issue won't go away. Until debts are liquidated, it's going to be impossible for the global economy to get back to anything resembling normal growth. Don't hold your breath.

For example, Portuguese banks borrowed over €100 billion from the European Central Bank (ECB) in February and March, according to The Guardian. National banking systems in Europe are having a hard time borrowing money from private investors. The ECB is the lender of last resort.

The trouble is, it appears the money borrowed by Portuguese banks isn't money used for loans to businesses and households. The money borrowed either props up the balance sheets of the banks (as a counterweight to enormous debts). Or, even worse, the money is used to buy yet more government bonds.

That was probably always the plan, of course. The ECB can't directly buy government bonds. But it can lend money to banks through its Long Term Refinancing Operations (LTROs). And the banks can then buy government bonds. And then the governments have money to contribute to the bank bailout funds. And everyone is happy...but no one is any further to putting the crisis behind us.

It's absurd, but it's persistent. You just need to be aware that this kind of pedestrian pace to the debt crisis doesn't mean it isn't serious. It is. And it's ticking.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

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