Friday, February 24, 2012

- IBM Safer that US Treasury Bonds

This is a great piece from the estimable Veronique De Rugy - that goes with the chart above. (It references this WSJ piece.)

The long and short of it is that there are companies whose debt is considered by the markets to be less risky than the government debt of the country where they are resident. This makes lots of sense. Multinational corporations have better balance sheets than the governments of most developed countries; certainly better than all those on the list above.

It used to be that the conventional wisdom was that the government can always use force to extract more revenue from the populace through taxation. And while violence (or the threat of violence) is still a very reliable method of getting money from citizens, the simple fact is that governments have promised to give away FAR FAR more than they could EVER possibly hope to collect.

The bond markets are very much aware that when it comes to government payouts, someone isn't going to get what they've been promised. Right now (in the US anyway) the assumption is that it's the taxpayers who will get screwed. They are the victims of government after all and have no choice in the matter. But the bond holders have a voluntary relationship with the government that they lend to, and therefore have more leverage.

Besides, as we're seeing in Greece, the laws can be changed on a whim by a government and arrangements can be made so that they don't have to honor their contracts after all. Not so for IBM or Apple.

In effect, the chart above is a reflection of the lack of character of the people we have running our governments. CEO's may be evil 1%'ers, but thanks to the financial markets, they all pay their debts or suffer the consequences. Markets have complete primacy over the actions of the private sector. To quote PJ O'Rourke, the market is a bathroom scale. You might not like what it says, but you can't just pass a law that says you only weight 170.

Politicians on the other hand, are doing their best to permanently suspend the concept of the markets being a reflection of 'consequences' for past actions. They're hoping that they can postpone those consequences long enough for the people in charge to retire from power. That's what the 'primacy of politics over the market's' actually means.

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