Howard Marks: Down to the Wire

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howard marks distressed debt investor

Memo to: Oaktree Clients
From:  Howard Marks
Re:  Down to the Wire
Here are the ingredients in the plot:  A problem everyone’s aware of.  If it isn’t resolved,
a shutdown with unspecified but possibly disastrous consequences.  A deadline which
seems indispensable, since in its absence it appears nothing would be done.  And despite
the presence of the oncoming freight train, movement toward a solution is deterred by
highly entrenched positions.  It’s truly white-knuckle time, and if the progress toward a
solution continues to lag, the things that must happen won’t.
I’m not talking about the nearly concluded drama at the National Football League, where
failure to reach a labor settlement for just a few more days would have caused significant
changes in the schedule for the coming year, upsetting the flow of wealth to owners and
players and depriving fans of the game they love.  I’m talking about the down-to-the-wire
battle over the U.S. debt ceiling.  I’ve decided to devote a memo to the debt issue and its
significance.  I especially hope it’ll be helpful to our non-U.S. clients, for whom the lack
of progress to date must be absolutely incomprehensible.
Interestingly, the immediate debt crisis is somewhat artificial.  It is occasioned now only
because of our debt ceiling, which currently limits the net debt of the United States to
$14.29 trillion.  Such ceilings are far from the norm worldwide.  Many other nations
seem to function no worse without them.
But the U.S. has the historical accident of a ceiling, and we must deal with it.  Because
the limitation is set in terms of absolute dollars and not indexed for inflation or growth,
we would run into it every few years even if our debt only grew apace with the economy.
“In fact, it’s been raised nearly 100 times over the decades.” (Financial Times, July 16)
But thanks to the especially rapid growth of our debt relative to GDP in recent years –
exacerbated by the Afghan and Iraq wars and the financial crisis – the ceiling has the
potential to provide some real excitement every once in a while.
The Relentless Growth of Debt
Greece, Ireland, Portugal, Spain, Italy, Iceland, the U.S., California . . . the list of
governments with debt problems is long and grows longer.  The issue has flared up in the
last fifteen months and is often in the headlines nowadays.
And yet, the general conditions causing the concern are nothing new.
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