Suspension of Debt-Belief

Includes: ERO, EU, EZU, IEV, VGK
by: Sudden Debt

I have been a close observer of the Greek Debt Crisis for quite some time now. What strikes me most is the absurdity of calling for additional debt as a solution. It's not enough that Greece already has a government debt rapidly approaching 120% of GDP and cannot realistically fund itself through the markets, its government, the EU and the IMF are proposing that it takes on even more debt, albeit at lower-than-market interest rates, as a way out of its already untenable situation.

Let's go back a few years to the height of the debt bubble when Greece - already over-indebted at 100% of GDP - could sell 10-year government bonds at a mere 25 basis points (0.25%) over Germany (the spread is now 400 bp). I maintain that this required a suspension of disbelief equivalent to observing Harry Potter ride a broomstick over the skies of Hogwarts on the silver screen and accepting it as fact, i.e. total immersion into fiction-as-reality. Park your brains at the popcorn stand, sit back at the comfy chair, sip the kool-aid and enjoy while the movie lasts. What, me worry? was the attitude. New age credit was flowing freely, whilst risk was supposedly being taken care of by newfangled instruments devised by the apprentice financial engineer-magicians.

Well, guess what folks? The movie's over. Suspension of disbelief is over. What's going on right now, best exemplified by the preparation of Greece to tap the IMF and EU for even more debt, it's like those folks who stubbornly refuse to leave their seats staring forlornly as the credits roll over the black screen, hoping to eke just a smidgen more of happy times.

We all need a radical reality check, to understand that our kool-aid was heavily spiked with debt acid. That for a while we lived in a make-believe world where we acquired goods and services with a mere scrawl at the bottom of promissory notes that someone else - obviously dropping even heavier acid - accepted as prima facie "assets".

In other words, we need to suspend our "debtbelief", that debt is a panacea for all economic ills from stagnant earned income to a minuscule savings rate and the emasculation of the western manufacturing and technological base.