Now it Begins to Unravel
by Wolf Richter
WolfStreet.com
November 21, 2016
The Credit Bubble Peak was Marked by “Totally Crazy Lending.”
Debt is good. More debt is better. Funding consumer spending with debt is even better – that’s what economists have been preaching – because the consumed goods and services are gone after having been added to GDP, while the debt, which GDP ignores, remains until it is paid off with future earnings, or until it blows up.
Corporations too have gone on a borrowing binge. Unlike consumers, they have no intention of paying off their debts. They issue new debt and use the proceeds to pay off maturing debts. Funding share-buybacks and dividends with debt is ideal. It’s called “unlocking value.”
Debt must always grow. For that purpose, the Fed has manipulated interest rates to rock bottom. Actually paying off and reducing debt has the dreadful moniker, bandied about during the Financial Crisis, “deleveraging.” It’s synonymous with “The End of the World.”
At the institutional level, “debt” is replaced with more politically correct “leverage.” More leverage is better. Particularly if you can borrow short-term at near zero cost and bet the proceeds on risky illiquid long-term assets, such as real estate, or on securities that become illiquid without notice.
The Rest…HERE
