The next big shoe to fall…..

In my contribution to the Green New Deal in July, 2008 I warned that corporate debt defaults were the next “big shoe to fall”.  We are all aware of the devastating consequences of defaults by sub-prime borrowers. However their debts are miniscule compared to outstanding corporate debts. Now, I firmly predict,corporate debt defaults are about to cascade down on the global economy, leading to devastating impacts, not the least of which will be widespread unemployment. How can I be so sure?

Thanks to Graham Turner of GFC Economics, I have been following the rise in the “prices” that corporates pay on their long-term loans; the yield on bonds issued in the capital markets.  These corporates do not enjoy AAA status, but they badly need finance for investment.  Over the last few days, the rise in the yields on their bond issues has been so sharp and so steep, that it is bound to bankrupt many, many businesses – no matter how skiful their entrepreneurship, how vital their products and services, how cautious their financial management.

Graham Turner’s graph, below, tells the whole story. The spike in this graph is a dagger aimed at the heart of hundreds, perhaps thousands of companies, large and small. Where, oh where are our central bank governors? What action are they taking to keep bond yields low? To protect the corporate sector from huge borrowing costs?  Or financial turbulence? To protect the finance sector from another round of defaults -corporate debt defaults –  that will make the sub-prime crisis look like ‘a walk in the park’?

I’ll tell you where our central bank governors are. They are trapped inside an ideological corset called, bizarrely, “inflation targeting”.  They are trapped inside an ideological box that insists that the private sector alone should influence rates of interest and bond yields. That government and the central banks should adopt a do-nothing approach to the direction of long-term interest rates and bond yields.   Central bankers are trapped inside an ideological framework that regards capital controls – vital if central banks are to influence all rates of interest, short and long, real, safe and risky  – as a form of unspeakable heresy.

Until they start thinking outside of this box, there can be little hope for recovery from this frightening crisis.