Why Crypto might be the best hedge against the next financial crisis (for dummies). PART 2
More than 50% of all corporate debt is sitting in BBB, hanging on before it falls into junk status.If corporate debt falls into junk status, the majority of institutions (pension funds, retirement funds etc..) will have to sell those corporate bonds because it’s too risky for them to own the bonds and this can generate a large liquidation and domino effect. If you are company “X” and your bond is now valued as junk, the interest of the loan you are taking is higher and you cannot afford a surge in the interest rate……..one word, bankruptcy.
I won’t go deep into this topic but I would like to mention that most companies are using this corporate debt / bonds to buy back their own shares in the stock market. Can you see the scam? Big companies no longer have to deliver added value to the marketplace and instead, they can use cheap credit to buy-back their shared profiting from stock appreciation. This situation it’s obviously incentivized by central banks and their credit expansion.
It all starts when some politician says <<vote for me and I will ensure that the government provides you with more “free” stuff than my opponent>> but we know there is no such thing as free education, free healthcare etc.
So what happens when the government spends more than the amount it earns from taxes? This process is also known as deficit spending, budget deficit or simply deficit. It has to finance itself with debt by issuing sovereign bonds. Do you remember the definition of a bond? In this case, the debtors are the citizens and future citizens. These people will have to pay debts through future taxes or currency depreciation (inflation).
It doesn’t matter if they call it “Quantitative easing” which is a fancy word to say they indirectly print money out of thin air to keep government spending at an all time high.
This process of financing government deficit with debt can be summarized as <<we are going to steal economic prosperity of the future in the benefit of the present by indebting those who hasn’t even born yet>> for example, a person born today in Spain automatically owes 26.000€ in public debt.
Don’t be naive, learn how the system works.
When it comes to understanding how we coordinate as humans or conflicts between us it’s all about Game Theory. In others words, when incentives have different players in society that act in a way or another, and this includes governments, institutions, mass media etc. There are economic incentives behind every news article you read, war and political / social movement.
So what are the incentives of politicians? Winning the presidential elections every 4 years, and as you can imagine, they have a very short-sight way of looking at the economy which most of the time needs long term policies.
How do they win? They promise better welfare (costs) for everyone to get more votes. However, they don’t usually talk about how they are going to finance more government spending or best case scenario they will say <<let the rich pay for it>> or <<we will tax big corporations>>, even though taxing the hell out of them It won’t cover the cost or change any structural problem (states keeps spending more year by year)
So what is the ultimate tool does the government have? Debt
Published at Sat, 14 Dec 2019 17:02:56 +0000
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