Wednesday, August 10, 2016


If you want to know hat's going to happen next in a Democratic administration, you just have to read the New York Times.  As any one paying attention knows, a big focal point of Mrs. Clinton's bid for the White House is increased spending (DUH!) particularly in infrastructure development.  No how one pays for all of this has always been the question but this week Little Paulie spelled it out in clear baby-talk which of course will be the salient points in Mrs. Clinton's argument.  In a nut shell, as he has been belaboring for well over a year is more governmental debt but he has also taken it a step further this time and suggested (demanded?) that in order to take advantage of these historically low rates that the Treasury begin a massive restructuring of maturities extending the purchase of Long Bonds and perhaps even going when we have never gone yet out to maturities beyond 30 years.  On the face of it the argument looks pretty good and quite frankly, if the effort were to be undertaken there is no doubt that massive sales of government debt in this environment would be a huge success.   What is massive?  A multiple of a trillion dollars...perhaps many multiples.  Whether used properly is of course another argument but a political one.  The fiscal (financial?) issues?  Substantial and serious and not dealt with in Paulie's treatise.

One has to understand that the entire basis of global credit has always been and remains today the value of the direct obligations of the United States.  Everything, and I do mean everything, is priced off of some maturity of the Treasury market.  Now perhaps part of the effort in the extension of the average life of government debt may be to steepen the yield curve that is flatter than a pancake not just Over Here but Over There and Everywhere as well, but I doubt it.  Nor do I believe this will be the effect.  rather..and this is assuming that the debt has a positive coupon, a big assumption these days...I suspect will be the creation of even greater demand for the world's finest credit at whatever level, creating the damnedest's battle of world-wide governmental issuers we have ever seen.

Now in Paulie's world, no big deal except he seems to dismiss the fact that the economy of the world still is driven by dollars.  Two things will happen: firstly there will be a shortage of dollars as the Treasury sucks up all liquidity to feed the ever ravenous state or secondly, starved of credit, the global economy slips into global recession...or both.  Frankly, I bet on both as the growth of governmental debt already exceeds global economic growth by a wide margin.  Within this scenario we are also faced with the onslaught of regulation as a consequence of the great recession, ignored by Paulie who, like its authors, never really understood the causes of the disease they were tying to cure which a dramatically reduced the risk appetite of financial institutions further reducing the availability of credit.

On the flip side of course is the investor or, in a category near and dear to me, the retiree.  We have no place to go.  The governments of the world have simply destroyed reasonable return opportunities leaving the average person with the choice of either accepting the status quo and reducing life styles and the quality of life or seeking yield wherever one can find it.  Turkey, Brazil...hey, how 'bout Venezuela!  And has Paulie ever considered the pension plans on which millions of Americans rely many of which still assume returns of 7% to remain actuarially sound, which, given the restrictions placed upon the nature of their investments, is insane.  The solution to those problems?  Paulie will never admit it but think government bailout--and more and more debt.

When might all this happen if ever?  I have no idea, but the road map is there.  I think it will take us to the place of which I have been speaking and I haven't even considered a bumps along the way such as an armed conflict in a world armed to the teeth by countries led by less than--shall we say--world statesmen as opposed to irrational midgets.  Many years ago in speaking about what I thought was a looming debt crisis a very wise man said to me; "You know, you guys are going down a road that has a lot of twists and turns to it.  Some day, you are going to go around one of those turns and there's going to be a guy with his hand out.  It's toll road you're on, you know that don't you?"  That was a hell of a toll we paid back then.  An entire continent lost a generation.  It will be a bigger one today.

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