Governments desperately seeking new ways to take out more Debt

March 30, 2018

Recently there have been more and more rumblings about a new “innovative” scheme for governments of the world to tackle their debt problem. NOT the problem of too much debt, mind you, but the problem of being maxed out on their credit cards and finding new sources of debt.

When most people look at the mountains and mountains of unsustainable sovereign debt in the world, they think in terms of simple economics and budgeting. These governments are hopelessly overextended and when their household is hopelessly overextended there are 2 simple, but not easy solutions:

1)  Find more money
2)  Spend less money

But those are both next to impossible for governments to do. Not being personally on the hook for any of the spending or debt, government bureaucrats will always seek the non-solution of finding more credit cards to open and then of course, max out.

What are they working on now? Here’s a hint: YOU are going to be asked to pay for this, not as a taxpayer, but as an investor.

Make no mistake, when “economists” discuss the possibility of GDP-Linked Sovereign Debt Bonds, they are simply seeking new credit cards to max out.

The brilliant idea behind these GDP linked bonds is that they will take the pressure off countries in the midst of financial turmoil by reducing the repayments on this debt in conjunction with GDP. If GDP plummets, so do the bond yields. If GDP is roaring, investors are getting rich. Robert Shiller, a Yale economist and major cheerleader for this type of debt structure explains it in The Guardian:

“The basic idea is simple enough. Governments issue GDP-linked bonds to raise funds, just as corporations issue shares. By issuing such bonds, governments pledge to pay in proportion to the resources they have, measured by their countries’ GDP. The price-to-GDP ratio of GDP-linked bonds is essentially analogous to the price-to-earnings ratio of corporate shares. The difference is that GDP is an order of magnitude larger than corporate profits represented by the stock market.

"As Sovereign GDP-Linked Bonds argues, the issuance of GDP-linked bonds will create “fiscal space” – a cushion for exigencies – for some countries. When government debt payments are fixed in currency terms, as they typically are today, countries get into trouble. In a financial crisis, they become over-leveraged, unable to borrow more, and forced to take drastic action that may impede recovery from the crisis. Taxpayers, rather than willing investors, are forced to become the final bearers of risk.”

The “benefit” of not forcing taxpayers to deal with the bailouts during a financial crisis, means the trauma instead falls on the “willing” investor class with “deep pockets.” This is a red flag. Unless you think it is a great idea to voluntarily sign up to be the next economic whipping boy, you should stay far away from these bonds. High level economists behind these are telegraphing that there will be no guilt in cannibalizing your portfolio because you should have known better than to buy these instruments knowing the abysmal financial state of the economy.

Another red flag is the very essence of these bonds. They are linked to the GDP. Government agencies and bureaucrats calculate GDP figures. These types of stats are already heavily manipulated. The idea that the government is going to be financially penalized for producing a high GDP number is a HUGE red flag. Shiller addresses this concern rather dismissively:

“Some worry that governments could manipulate their GDP statistics so that they will have less to pay. But that is unlikely, because lower GDP would be taken as a sign of the government’s failure.”

It is not that hard to imagine the Bureau of Labor and Statistics creating a separate formulation of the GDP figure, say, Debt Adjusted GDP or some such thing, which magically never budges. In the same way they always find some way to manipulate the CPI to avoid paying seniors a fair and truthful cost of living adjustment on Social Security benefits, they WILL find a way to avoid paying you your fair share of yields on these bonds. Shiller does not give the bean counters at the BLS enough credit. Or, perhaps he does and the one he is not giving enough credit to is you, dear investor, to know what to avoid like crazy in the investment world.

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