Buy My Debt Ben!

As I walk, this wicked world, searching for light in the darkness of insanity
I ask myself, is all hope gone, is there only pain, hatred and misery
As I walk on through troubled times, my spirit gets so downhearted sometimes
Where are the strong, and who are the trusted, where is the harmony, sweet harmony
Each time I feel this inside, it just makes me want to cry
-- Nick Lowe

The world of global finance continues to sail into ever new territory. The WSJ has a good piece about the ever expanding bubble in the bond world headlined, "Bond Markets Growing Riskier":

Last week, prices on high-yield, or junk, bonds hit their highest level since 2007, nearly double their lows of the credit crisis. Nine months into the year, companies have sold $172 billion in junk bonds, already an annual record, according to data provider Dealogic.

The demand for bonds has allowed some of the riskiest borrowers to sell bonds with fewer protections for investors. These provisions, or covenants, prevent companies from taking actions that would hurt bondholders and would protect investors if companies are sold.

The bond boom has so far been a positive for the economy, allowing the U.S. government and major corporations to borrow at cheap rates and giving weaker companies financial breathing room until business picks up.

But continued strong demand by investors can have unintended consequences. Cheap, plentiful debt fueled the housing and leveraged-buyout booms, both of which collapsed after buyers who borrowed too much couldn't repay loans.

The WSJ giving a warning about a bubble? Well, the bond boys, that is people like PIMCO, who just didn't start buying bonds once their ability to make 10%-plus a year on stock market, real estate or other previous bubbly investments popped, seem to be getting more nervous. Mr. El-Erian writes,

Market measures of risk for peripheral European countries (Greece, Ireland, Portugal and Spain) are at or near danger levels… despite exceptional support from the ECB, EU and IMF, and despite the implementation of adjustment measures on the part of some.

The failure to reduce risk spreads means that the public sector bailout is not working. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.

This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries (e.g., Greece) have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion.

And,

The second issue is even more complex. It pertains to the global configuration of currencies.

Last week, Japan intervened massively to stop its currency from appreciating. It did so in a unilateral fashion and, immediately, faced criticisms from Europe and the US.

Meanwhile, in a sharply-worded testimony to Congress, Treasury Secretary Geithner provided lots of data to those that feel that the US should have already labeled China a currency manipulator. And while China has recently accelerated the rate of its managed appreciation — 1% in the last week compared to just 1.6% since the country declared great “flexibility” back in June — this is proving insufficient to counter growing currency tensions.

These latest foreign exchange developments bring to the fore an inconvenient reality. While not all industrial countries wish to make it explicit, they are happy (indeed eager) to see their currencies depreciate. They see this as helping them address the extremely difficult challenges associated with a protracted period of low growth, high unemployment, and limited policy effectiveness.

The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly. As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level.

Obviously, Mohamed never read Ben's book on the Depression, how the central banks caused it, and the solution was an in tandem devaluation of global currencies. Ok, that's a problematic solution if you own bonds from across the planet, as its pretty much lose, lose, lose, but what price monetary stability...err..something like that.

Anyway Quantitative Easing II is coming and I suggest the start of a campaign called "Buy My Debt Ben!" If you have mortgage, credit card, second car, student loans, whatever, write a letter to the Fed Chairman on why the Fed should buy your debt. Be deferential, and make sure if your debt is held by one of the big banks you point that out, it might help.