Government Debt Is Starting to Look Almost as Sketchy as Payday Loans
If there is one thing every honest money-saving advisor would agree on, it’s that a payday loan is a bad idea. Taking a high interest loan backed by nothing but your word to pay off your current account to fuel consumption with no capital investment is just leading you on the road to ruin.
However this simple message of living within one’s means does not seem to have reached the gilded ears of central banks and governments around the world. As inflation rises (who could have guessed the borrowing binge of 2021 would have resulted in higher inflation?), both the EU and American governments are now caught between a rock and … well, a rock.
Trapped into a cycle of borrowing to cover current account expenditure, even debt-resistant economies like Germany and New Zealand need to keep on this self-destructive path. The collateral used is bonds, about as useful and as stable as ever; the international bond market has exploded in the last ten years.
[Read More: “The ECB Is Playing a Dangerous Game with ‘Collective Action Clauses’ on Bonds” by Malachy McDermott]
Some of these modern bonds (In all their shapes and forms) are now also backed by CACs (collective action clauses), meaning that should the creditors agree, they can reduce the amount of payout on the bond if the country issuing the bond is falling behind. Unfortunately, this does pave the way for one of two (very bad) outcomes:
- The bonds are bought by friendly creditors like the European Central Bank (ECB), large blocks that will lean favorably on the side of the issuer due to a roundabout political method. As an example, Mario Draghi has more than a few friends in the ECB (being the former head of the organization) and is now prime minister of Italy, taking on ocea
Article from Mises Wire