The Phaserl


Trouble In Junk Bond Lala-Land

by Wolf Richter, Testosterone

Private Equity firms have seen this coming for months. They’re positioning themselves for it. In April, Leon Black, CEO of Apollo Global Management, explained it this way to an incredulous world: “We’re selling everything that’s not nailed down.”

At the time, there were rumors that the Fed would start tapering its $85-billion-a-month bond purchase program. It would cause bloodletting in the bond market, raise interest rates, and wreak havoc with the highly leveraged companies that PE firms have in their portfolios. The Fed’s purposeful cacophony has been getting louder. Goldman Sachs, the all-important factor in this, just gave the Fed the official go-ahead: Goldman economist Kris Dawsey predicted that tapering would start in September, and bond purchases would end by mid-2014. By which time the Fed’s balance sheet will have swollen to $4 trillion.

Yup, I know.

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1 comment to Trouble In Junk Bond Lala-Land

  • rich

    Illogical Economics – Guest post by Hawkeye

    Money as debt

    The first pillar of Soddy’s argument surrounds the very nature of money. Everyone uses money, yet few people truly understand what it actually represents. The extent of monetary relations back in Soddy’s day is probably a lot less frequent than now, as many transactions and means of subsistence probably lay outside of market transactions. However, Soddy gave a cogent explanation of money:

    “We thus come to look upon money – quite irrespective of whether it is specie or paper – as a token certifying that the owner of it is a creditor of the general community and entitled to be repaid in wealth on demand.” Wealth, Virtual Wealth and Debt (1926) p134

    Money is more than just a more advanced substitute for barter, declared Soddy. In barter, all transactions cancel each other out, but with money, there must at all times be someone left holding tokens, rather than real goods or services. Money is therefore a form of negative inventory. As negative objects are not physically possible, we must be dealing with a fabricated construct. A holder of money forgoes actual ownership, instead deferring his purchasing power. It will then require a further social arrangement for this token to get converted back into real goods. Up until it is handed over, it is not a real asset at all, but wider society’s liability. As Soddy quipped:

    “Money is the nothing you get in return for something, before you can get anything”.

    Therefore, it is not a harmless veil over barter. It is a token of indebtedness, and a claim over the real inventory of goods and services in society. Standard economic models on the other hand declare that the money system is completely neutral. In their worldview society’s mutual indebtedness cancels itself out. If that is the case in their economic models, then why can’t the debts be cancelled out in practice? Mainstream economists refuse to contemplate this very obvious logical contradiction. To them, the money system is absolutely essential for a functioning economy (i.e. it must be preserved at all costs) yet at the same time is unneccessary to model!

    No standard macroeconomic model takes into account the burgeoning balance sheets of individuals, banks, companies or Governments. They are obsessed with liquidity, for sure, but have no interest in the liquid!

    Soddy, however, was also perceptive enough to understand that the source of most circulating money was through private bank credit creation. He was highly critical of this unearned priviledge, as in his eyes a bank undertook no genuine forfeiture when creating a loan [1]. In reality the debts are simply an accounting entry. But far from harmless, they help to enforce a power relation within society, and Soddy was well aware of this situation citing a 19th barrister and expert on the subject of credit:

    “The merchants who trade in debts – namely bankers – are now the rulers and regulators of commerce; they almost control the fortunes of states.” H.D.MacLeod quotation in Wealth ……. p77

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