Global Debt And The Kingdom Of Denmark by John Mauldin, Mauldin Economics

In Thoughts from the Frontline, I am in the middle of writing a series on debt. I realized on Sunday that the second installment wasn’t ready for prime time, so I will work on it some more and send it out (hopefully) this coming weekend. In the meantime, in keeping with the theme of debt, for today’s Outside the Box we have the following issue of The Credit Strategist from the ever-insightful Michael Lewitt. Michael starts out musing on debt and then shares a number of useful thoughts on a variety of market topics, with his usual panache.

“The day-to-day volatility of the stock market is a side-show; the real story is the massive build-up of debt and what it means for the value of the currencies in which those debts are allegedly going to be repaid in the future. The truth is that those debts are never going to be repaid in constant dollars. Those who understand that and act accordingly will profit enormously; those who don’t will fare very poorly.”

I appreciate Michael letting me forward this letter to you. You can subscribe to his letter at

As I send this note I am flying from Orlando back to a much colder Dallas, but spring can’t be all that far off, can it? Better here than Boston, I guess. I am glad my travels have not taken me to the Land of the Frozen this winter.

Finally, I was saddened, as I know many were, to hear of the passing of Leonard Nimoy. He was, and always will be, Spock. He was part of the zeitgeist of my generation. The alien character he created with his acting made us think about what it meant to be human, in much the same way that Data did for later Trekkies. And while it is classified as sci-fi, Star Trek is a story about the human condition, and Spock was the perfect foil for the writers and creators of the stories.

I wrote a chapter in Bull’s Eye Investing called “Finding Your Inner Spock,” about the behavioral quirks that all investors have, suggesting that we all need to develop the ability to control our emotions in the investment process – by finding our inner Spock, so to speak.

Leonard Nimoy lived long and prospered, and now he boldly goes on to the next leg of his journey. I’m sure he will find it fascinating. I am, and will always be, his fan.

Your trying to understand debt analyst,

John Mauldin, Editor

Outside the Box [email protected]

The Kingdom Of Denmark

By Michael Lewitt

Excerpted from the March 1, 2015 issue of The Credit Strategist

“What is a debt, anyway? A debt is just the perversion of a promise. It is a promise corrupted by both math and violence. If freedom (real freedom) is the ability to make friends, then it is also, necessarily, the ability to make real promises. What sorts of promises might genuinely free men and women make to one another? At this point we can’t even say. It’s more a question of how we can get to a place that will allow us to find out. And the first step in that journey, in turn, is to accept that in the largest scheme of things, just as no one has the right to tell us our true value, no one has the right to tell us what we truly owe.”

– David Graeber, Debt: The First 5000 Years (2011, p. 391)

In Hamlet, Polonius advises his son Laertes as he sends him off to school: “Neither a borrower nor a lender be,/For loan oft loses both itself and friend,/And borrowing dulls the edge of husbandry.” Borrowers and lenders have conducted themselves over the ensuing centuries in ways that would not have surprised Shakespeare, who understood human nature all too well. Later in the play, Marcellus, a soldier, warns Hamlet that “Something is rotten in the Kingdom of Denmark” after they are spooked by the ghost of Hamlet’s father. This is a reference not only to the murder of Hamlet’s father, the King of Denmark, but speaks to the fouling of the relationships that govern the kingdom. Those relationships are ones of blood and obligation; in one form or another, they are different forms of debt. Debt is not merely a contract between two parties; it is a solemn pact of trust. When it is sundered, not only is money lost but husbandry – the management of society’s resources – is corrupted. We learn from Shakespeare’s great drama that a world ruled by debt is extremely fragile.

February 13th marked the 25th anniversary of the bankruptcy of Drexel Burnham Lambert. I remember driving to work at Drexel’s Beverly Hills office that morning having no idea what was about to happen. My years at Drexel in the late 1980s and those I spent managing the firm’s private equity holdings in the 1990s were an intensive education in credit and human nature. Twenty-five years after Drexel’s demise and seven years after a crisis that pushed the global economy to the brink of collapse, the world is drowning in debt and derivatives. As a point of reference, when Drexel filed for bankruptcy, it had a balance sheet of $3 billion. When Lehman Brothers filed for bankruptcy in 2008, its balance sheet was two hundred times larger at $600 billion. As Figure 1 below illustrates, debt has grown exponentially while the global economy has crept along at a petty pace. Six years after the financial crisis, interest rates have been driven below zero in much of the developed world,2 a sign that policy makers have failed to create sustainable economic growth. (The latest tally is that $1.9 trillion of European sovereign debt is trading with negative yields.) They have managed to inflate financial assets but left the real economy behind. For example, U.S. equity prices have gained 122% since 2009 while US nominal growth has grown by only 18% over the same period. Having exhausted their ability to employ interest rates as a policy tool, policy makers are now shifting their sights to currencies to stimulate growth. But currencies are themselves nothing more than a form of debt, a promise by a sovereign. And those promises are being actively debauched in a series of currency wars that are certain to end badly for those who depend on fiat money for their daily bread.

Figure 1

Unsustainable Global Debt
Drexel and its aftermath taught me many lessons. The most important is that the world of finance is the world of human nature in all its terrible beauty. And that world is driven by incessant change. Drexel was thought to be the most powerful firm on Wall Street, yet it collapsed overnight. That taught all of us working there not only a lesson in humility but a lesson in the fragility of all financial structures, especially those built on leverage. Those who fail to acknowledge and adapt to change are always flirting with failure. Today’s investment landscape is filled with investors, strategists and media pundits who refuse to admit that we no

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