Bill Bonner

The Dow shot up 152 points yesterday…following an announcement that Greek voters had approved more austerity measures.

So, the Greek crisis has been solved…Dominique Strauss-Kahn may not have raped that hotel maid, after all…and the Chinese are buying euros.

Whew… A close call! But now the Greek crisis is behind us. We can get back to work…and all get rich.

The French and Germans will pretend to fix the problem. The Greeks will pretend to cut spending. And lenders can pretend to get their money back.

But what happened to all that debt that Greece couldn’t pay?

Wait a minute… We know what you’re thinking. You’re thinking that now that the crisis is behind us, interest rates can return to normal. And at normal interest rates there isn’t any problem. After all, it was just a temporary problem caused by jittery and greedy lenders, right? And as long as the full weight and credit of the European financial authorities – with some help from their colleagues East and West – is behind the Greeks, everything should be all right. The Greeks can borrow money to plug holes in their budget and pay the interest on past loans.

And you’re right – sort of.

Well, you would be right if lenders were born yesterday. They would just lend more and more so the Greeks could borrow more and more, forever and ever, amen.

And don’t forget the rest of Europe’s debtors – Ireland, Spain, and Portugal, for example. They’re in the same boat, more or less. They need to borrow money now, largely to service the debt they borrowed before. And as long as interest rates don’t rise, this can go on for a long time.

But what if lenders had been around the block once or twice? It’s often said that the stock market is about the future. The bond market is about the here and now. But what if bond buyers suddenly recalled how they got mugged the last time they went around the corner? What if they remembered what happens when debtors borrow so much that they could never pay it back?

Wouldn’t that lead them to think that…

1.) Lending more would be a mistake
2.) Or, at least ask for higher interest rates…?

Well, you can imagine as well as we can.

The Greeks owe too much. So do a number of European countries…and so does the United States of America.

What do we mean by “too much?” Well, nothing precise. But if you add up all the debt, it comes to over 100% of GDP. Which means, you ‘normally’ would need to devote something like 5% of GDP or more to pay the interest on it. And if a government can collect 20% or 30% of GDP in taxes, it means it has to devote as much as a quarter of all tax receipts just to cover the interest on money it already spent.

Imagine that you were in that position. Theoretically, you could still be okay. You could stop spending beyond your means…and then ‘grow your way out of debt.’ But that’s not what happens. Crowds of zombies take to the streets. Political pressures force governments to keep spending. And if your deficit is greater than your growth rate, you’re going deeper into debt.

Let’s see…the US has a GDP growth rate (taking the feds at their word) of less than 2%. What’s the deficit? About 10%? Hmmm…not good.

But this math is obvious, isn’t it? Even to the people who buy bonds, right?

So how come US bonds have generally been going up, not down?

That’s the real question, isn’t it?

NB: the Chinese are buying euros.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

Recent Articles

How to Make the Casinos Pay You for a Change

Greg Guenthner

It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.


How Low Will Oil Go – And What Can You Do?

Matt Insley

The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”


Cuba’s Berlin Wall Moment

Peter Coyne

Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...


The $4 LED Trend You Don’t Want to Miss

Chris Mayer

The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.


Three Time Bombs in Your 401(k) and How to Disarm Them Now

Dave Gonigam

By the time you do… Kaboom! It’s too late. They’ve already blown up your retirement. There are three time bombs the mutual fund industry has planted within your 401(k). By the time you’re done with this article, you’ll know how to identify them. And, more importantly, how to disarm them. Dave Gonigam has the scoop...


Got Tech Stocks? Sell These Flops Now…

Greg Guenthner

The latest victim of the crude rout is none other than the stalwart tech stocks. These are the go-to trades that have held up all year long. I'm talking about stocks like Google, Yahoo! and Microsoft. Like I said before, these aren't no-name stocks you're seeing drop more than 10% from their highs last month.