The Economy

Greece's debt to GDP is currently around 200 percent. It's much higher today than it was when it technically defaulted after the financial crisis. The thing that changed was that failure needed to happen, and instead a lot of bad debt was papered over by central banks, in the case of Greece the ECB, which pushed real interest rates into permanent very negative territory to keep enabling more debt to prop up all of the already-bad-debt they had caused. Greece just kept borrowing more and more, and the ECB kept real yields negative to enable it. That wasn't just to prop up Greece, it was prop up mountains of debt all over the place that they were responsible for in the first place, all of which can't handle higher yields without defaulting and bringing about a debt crisis.

Right now? Yields are rising a little again, and that is why you are seeing some things start to buckle again, mostly because inflation became a problem and central banks around the world which unleashed a sea of liquidity in the form of debt during the pandemic unconscionably making financial conditions even looser, are being forced to at least pretend that the inflation is a priority and they are going to end the party.

That is why some of the emerging markets are starting to flash debt crisis problems again. The Fed signaled rate hikes and is talking about trying to unwind some of the $9 trillion balance sheet it accumulated trying to keep credit flowing, and even without that, U.S. Treasury yields have started to rise as the bond market is trying wrestle control away from the central bank, telling it it will deal with the inflation if they don't. Those higher yields make it so that it is more difficult for overly indebted entities to borrow more to service all the debt they already and have saddled themselves with. It has sent the dollar higher relative to those emerging market currencies, and after a debt binge, you also see the debt crises start rearing its head in those weaker economies first when they have way too much debt.

If rates keep rising. ... well, the amount of bad debt, not just sovereign debt, that has been enabled since the financial crisis is going to astound people who have kept their heads in the sand. Those central banks may try to do more of the same, kicking the can down the road by trying to pile more debt on top to keep the fantasy going. The difference now? The inflation. If they do what they always do, they are just pouring gasoline on the inflation fire. They would love to try to inflate away the debt and essentially tax people that way to pay for the party that already happened. But inflation has been running so hot, sending food and energy prices soaring worldwide, that it is going to be difficult for them to do that without riots if prices keeping rising at this pace.

Regardless, Greece is still a debt bomb, they just kicked the can down the road by answering a debt crisis with exponentially more debt. And unless central banks can keep worldwide debt levels growing in perpetuity -- answering too much debt with more debt all the time -- there is going to be a debt crisis and massive credit defaults at some point. The longer it goes on, the worse the fallout. Interest rates are the cost of money. They have manipulated that cost to make it cheaper than free to borrow (People have actually gotten paid to keep borrowing) for a very long time, and people allowed it. There is so much bad debt out there that was misalllocated because the debt markets were distorted for so long.

That is what you are seeing in Sri Lanka, and if rates keep rising, it's just the tip of the iceberg.

 

I didn't read the full story, maybe I should before posting. ... But we have been in a phony economy since the financial crisis. Really since before, because what led to the financial crisis was a debt binge, and then rather than letting all the failure and defaults needed to clear it happen, they propped it by enabling more debt piled on top.

With debt mispriced -- being manipulated -- it leads to a lot of malinvestment. And at the extreme, it created a wealth effect -- what the central bank actually cites as something positive. Half the country, people with the means, have a stock portfolio that ran up in price on the back of that mispriced debt. In all kinds of ways, for example companyies being able to borrow endlessly at negative real rates and then using all of that borrowed money to buy back their own stock, sending the price higher.

One of the ways that the central bank in the U.S. kept that debt cheap was by creating new money out of thin air and buying debt assets -- again driving up the price, which keeps their yields down. And one area they stepped into, hiacking the market, was the mortgage-backed security market.

So you have had all these forces at work already creating an artificial wealth effect, and it went into overdrive during the pandemic because they started doing more of it on steroids. You had people cashing in on overpriced risk assets to buy homes, and the lending market for homes has been severely mispriced, driving demand. And it has driven up home prices from absurd levels to megabsurd levels. And people have used their existing equity in their homes as a piggy bank, putting themselves into more and more debt. The lending markets are so mispriced that debt permeates everything -- our government, businesses, regular people.

When the central bank destroys price discovery to the extent they did to create a fantasy, it pulls demand from the future into the present. You basically borrow. ... to have a party. And they took it to the extreme. The boom has been massive.

What I am sure that story is saying is that the bust that was inevitable all along hasn't happened yet, so worse times are a coming.

What is happening right now is that the combination of monetary madness and fiscal irresponsibility that went berzerk with the pandemic spilled over from rising asset prices (to a large degree, the money was staying in the casino) to them putting so much money in everyone's pockets (not just the half the country with equity in a home and stock portofolio) that they created so much demand that it couldn't keep up with supply, especially as that supply faced challenges due to the pandemic. And that has taken a lot of other prices though the roof.

And now? The Fed is being pressured to deal with it. ... but the only way to even try to deal with it is to STOP the madness, and that means credit defaults, economic contraction, and an end to the party.

They don't want that, obviously. Which is why they have dithered, even as inflation has become more and more of a problem. They would rather try to inflate away all the debt they are responsible for, but the inflation is so bad -- and people have no understanding of how we got here -- that they can't just do it. On top of it, the Fed is very powerful, it has totally commandeered the debt markets for a very long time, but those markets are fighting back now, starting to tell them that if they don't address the inflation, the market itself (what a novel idea) is going to drive yields higher (make it more expensive to borrow) and do it for the Fed.

And the problem. ... what that story is probably about. ... there is so much bad debt (money that was not used productively) due to the stupidity we have lived, that the world can't afford even nominally higher interest rates without crashing things. And that has ramifications for a lot of people who thought they were flush due to the wealth effect, but were really just getting dragged along by an artificial boom that is going to lead to a necessary bust.