There have been some interesting developments over the past week that give me additional conviction that the next crisis the investment markets face will be a sovereign debt crisis (government bonds). We’ve already seen the early stages in Europe when yields in Greece, Portugal, Ireland, Italy and Spain spiked higher. Now we have bond yields across the globe rising rather sharply since April, indicating that investors will no longer accept such low rates for the risk of lending to nations.
An overwhelming majority of countries have gotten themselves into a financial bind and for some reason the proposed solution is always… more taxes! I find it concerning how quick governments are to spend other people’s money and how wastefully they usually do so. Governments have been on a massive hunt for additional tax revenues and last week the G20 agreed to share all information on people/companies to crackdown on tax evasion. While I don’t support illegal tax evasion, I have no problem with companies being creative to legally minimize their tax burden. Companies like Apple have done this for years. Ultimately, decisions like this are very deflationary for the global economy because it encourages hoarding of money rather than new investment and growth, and takes more money away from the extremely innovative and productive companies of the world and puts it in the hands of governments.
In order for governments to survive, they either need to operate at a surplus (good luck with that) or they need people to continue lending them money (buying their bonds). But what happens if no one is willing to lend to a government any longer? They create forced loans in the form of asset confiscation and they give you an IOU in the form of future payments. Numerous countries have done this in the past and Poland just joined the list by taking approximately $37 billion from private pension funds to effectively cancel the debt to reduce their debt-to-GDP ratio. The Polish government said they saw no other option. This will hurt the recipients of the pension benefits the most because the government will most certainly make lower payments than what the pension funds could have earned on their own. Historically, this is one of the last steps a government takes before facing some serious issues. To mention a few others, Argentina, Portugal and Hungary have also nationalized private pension monies over the last decade and there have even been rumors that the US has been discussing this as an option if other nations eventually cut back their lending. Considering that so few nations support a strike on Syria, it will be interesting to see how that conflict plays out and if it hurts ties with our major creditors (i.e. China, etc.).
-Nick