WHY ALL THE HOO-HAA ON SOVEIREIGN DEBT DENOMINATED IN OWN CURRENCY…

There are so many articles written that bemoan the debt owed by US (in dollars), UK (in Pounds), China (in Reminbi), Japan (in Yen) — that it is getting a little crazy. Any five-year old can understand that it is OK to owe the world as many cookies as you want — provided you have a cookie making machine in your backyard. In fact, the only thing that makes perfect sense is that debt in your own currency should never be paid off by taxing people (political suicide) — it should just be monetized. The only time this does not make sense is when your currency is not fiat currency — or rather it is backed by some limited physical commodity like gold.

Let’s look at some ideas which serious people pontificate on …

1. When govt borrows money, private borrowing is crowded out. This kinda assumes that there is a fixed pot of money to invest in. Can this be true … especially when you realize that Japan sells bonds (JGB) to the Japan central bank (BOJ) which creates money by pushing a button. If private buyers are not ready to buy UST, they will be bought by the Fed Reserve which can create money at will. The pot of money is infinite.

2. Too much monetization will reduce currency value — true for Mexico but not for US, UK, EU, Japan and China. There is no alternative for holding these currencies and they are all monetizing today or will monetize tomorrow. What is an investor to do — sell dollars to buy Argentina pesos? If you think the dollar/Euro/Yen/Yuan will fall — think against what? (Just to be clear the Euro has some unique problems that could take it off this list…)

3. All of this will lead to inflation — again true for asset valuation. Think real estate, art, stocks (especially solid dividend paying), old wine, etc. Not for milk, coffee, tea, oil, coal, energy — stuff that the grunts need. CPI will be determined by how much income the bottom 80% has — and this is falling everywhere in the world. I don’t care about your politics, but this ain’t changing anytime soon.

When serious capital is accumulated by an individual (think the top 10%) — the first priority is always capital preservation. When (if ever) I make my first $10M, my immediate focus will be to never lose it and get back to struggling. So what if I make only 0.5% on it. If I am smart enough to make $10M I am smart enough to know that any scheme offering superior market returns on a long-term basis is for fools and people playing with OPM (other peoples money). In fact, I may even take my first $5M and put it in negative yielding treasuries (short duration) if I have to. I need return of capital not return on capital.

As inequality keeps increasing — there will be a growing demand for a safe asset from the top 10%; even if you have to pay -0.1% or -0.2% (or some such number) for it.

So let’s accept some facts — sovereign debt is going lower in yield (in fact negative makes the most sense for must have currencies) and for the top countries debt denominated in their own currency is absolutely not an issue — because it can disappear by one click of a button.

Tell me why am I so wrong…