Wednesday, April 28, 2010

A possible preview of our future

A financial blog on the UK Guardian website is making live reports of Greece's financial crisis. This morning the yield on 2-year Greek bonds briefly spiked at 38% before settling down to 16% in the afternoon.

Bond yields increase when bond prices fall, so Greece's high yields are simply an expression of a severe drop in demand for them. Investors now fear that Greece won't be able to afford the interest payments to all of its bondholders - i.e., that it will default on its debt - so it takes a much higher interest rate (16% to 38% instead of the earlier 1% to 5%) to convince someone to take the risk of owning a Greek bond.

These higher bond yields spell doom for the budget of the Greek government, because they represent the interest rates that Greece will have to pay in order to borrow any new money through the sale of bonds. It's not difficult to picture a death spiral here, where interest rates go up, making it more difficult for the Greek government to pay off its older debt by issuing new debt, which reduces investor confidence in Greek bonds, which causes the bond yields to rise even higher ...

This is one possible outcome for the U.S. and every other indebted industrialized nation if we continue to borrow our way to financial oblivion. It will be bad enough when Social Security, Medicare, Medicaid, etc. suddenly stop making payments as our government runs out of money, but thanks to the Obamacare monstrosity, our entire health care system will soon rely on bond sales too. God help us all.

1 comment:

Cathy said...

To your final statement may I respond with a sincere - Amen.