Yesterday I heard interview on Doomboomberg radio with a professional historian who studies the history of debt. He made couple of interesting points, for example one is related to my bullish sentiment toward the Treasury debt.

He said in the whole history of the World the government debt was never ever paid back. Instead, eventually every government debt is:

  1. restructured
  2. canceled
  3. defaulted

So our US Treasury bonds will have to go, eventually, one of those routes. Despite the AAA rating the priced-in probability of the default is, must, and never be zero, which means treasury bond yield will always have some premium above inflation.

You know that I’m bullish Treasury bonds based on my deflationary expectations, but now I believe that the entry points into position must be selected carefully and the amount of investment must be proportional to other investments. There is a big difference between Japanese government bonds that yielded 1% at one point our Treasury bonds. Japan is a next exporter with very healthy combined country balance sheet. It doesn’t matter that the balance sheet of the Japanese government is not so good as long as the country as the whole is healthy. After all, government can always raise taxes if the tax base is rich. The future of Japanese government debt from the list above is 1. restructured

Another interesting point the guy did was related to the collateral of our debt. He says that our government is refusing to allow foreign corporations to own our “strategic” businesses, which is pretty much every all the good corporations.

If Chinese cannot convert our bad debt into owning Boeing and Exxon Mobile, why should they bother to lend us any money? After all, it is crystal clear that our debt will never be paid off so the only reason to lend is to expect that they will be allowed to pick the gems of American corporate world as the refund for the defaulting debt.

And one funny point he made concerning the nature of debt and our current prosperity.

In fact anyone can create new debt, for example the tenant who did not pay the rent creates new debt. But this debt is useless for the landlord, can’t go and buy groceries for that debt.

What happens instead in our economy is that when tenant can’t pay the rent he goes to the bank, borrows money and pays the rent. It results in economic prosperity, because the landlord made profit, the bank made profit on debt payments, the debt is packaged into CDO and sold on the secondary market, which creates liquidity. The pension fund, which purchased the packaged debt paper is posting profit, because the yield on this debt is well above treasury bonds but the packaging magic made it AAA. The default rate is low, the money supply is growing.

But at the end of the day it all happened because there is a renter who can’t pay his rent