Perils of reckless debt

Apr 15, 2015

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Diary,

Today, we plunge into the sublime. That's right. We are leaving the ridiculous and the absurd behind. Instead, it's head first into the dark pool of things we will never understand and probably never should try. Who knows? There may be rocks down there.

First, we pause to note that nothing worth noting happened in the markets yesterday. The Dow rose 59 points. Gold fell $7.

So, we're back to our dreadful dive downward into the unknown, unknowable, and probably not worth knowing. The immediate cause of this plunge is a news item we read just yesterday. Bloomberg has the story:

    Just when debt-addicted American companies were starting to worry that Federal Reserve Chair Janet Yellen was going to take their proverbial punch bowl away, along came Mario Draghi.

    The European Central Bank president has made borrowing so cheap in the region that foreign corporations are selling record amounts of debt. Forget the deeper, bigger U.S. corporate-bond market. Borrowing in euros is all the rage these days because it's about 2 percentage points less expensive to do so.

    About 65 percent of the record 60 billion euros of investment-grade bonds sold in March came from overseas companies, according to a March 27 Bank of America report. And a lot of those sellers are based in the U.S.

    "The appeal of Europe is likely to continue throughout 2015," Fitch Ratings analysts Michael Larsson and Monica Insoll wrote in an April 1 report. They predict non-European issuers will sell twice as much euro-denominated debt this year than they did in 2014.

    The trend comes down to basic math.

    Yields on investment-grade bonds in Europe have fallen to 0.99 percent, compared with 2.9 percent on those in the U.S., according to Bank of America Merrill Lynch index data. Debt is so cheap in Europe that U.S. companies are saving money even if they buy currency hedges that have gotten expensive as the dollar's soared versus the euro, according to Fitch.

Last week, we looked at the glass half empty - that is, at the lack of new start-up businesses in America. Today, we look at the glass completely bone dry!

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Yes, for every business not started in America, there is at least one that also doesn't go broke. In 2014, the number of US corporate bankruptcies dropped to less than a half the number in 2009.

The poor bankruptcy lawyers! Imagine them. Sitting in their offices, with spiders building cobwebs in their doorways. Lonely, bored...on edge of desperation.

But whence this big drop in bankruptcy rates? Why can't businesses go broke like they used to? And how come there are so few new business start-ups?

Look no further than Yellen, Draghi et al. Thanks to them, borrowers can score money at less than 1% interest from apparently compos mentis lenders. What does it mean? Or even more into the realm of the sublime, imagine that you are borrowing at negative real interest rates. JP Morgan says there is as much as $3.7 trillion worth of debt outstanding for which the lender gets no more than a poke in the eye.

We pose the question not as a financial matter, but as a philosophical one. The world works - the financial world certainly and maybe the rest of the world too - by rewarding effort, self-discipline and forbearance, while punishing error, sloth, and impatience. These verities are written down somewhere. The person who works steals a march on the layabout. The person who takes the time to study and learn is able to do what the ignoramus cannot. The person who saves his money can lend it out, thus earning more money.

But what if the saver is punished...what if, for his trouble, he actually earns a negative yield?

Or, look at the other side. Look at the borrower. Imagine a restauranteur whose cuisine is so repulsive and whose kitchen is so untidy that diners regularly need to be rushed to the hospital to have their stomachs pumped. He might borrow money to set up his restaurant, but in a normal world he would soon be unable to pay the interest on his loan. He would default and be out of business. Diners would be spared.

But imagine if he could borrow below the rate of inflation? The worse his business did the more he needed to borrow. And the more he borrowed, the more money he made! When would he default on his loan? When would he be forced out of business? Hell will close for business before he does. In what universe does this work?

"Creative destruction," is the term used by Schumpeter to describe how a healthy capitalist system works. It clears out the deadwood from time to time, by destroying businesses that can't make a profit. Now, thanks to Mario Draghi, the wood just gets deader.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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