The Solvency Problem

There's a room where the light won't find you
Holding hands while
The walls come tumbling down
When they do, we'll be right behind you
--Tears for Fears

Governments around the world are fighting a solvency problem. Fueled by ultra cheap credit provided by central banks, individuals, organizations, and nations borrowed a ton to live large in the present. Some of the money obtained from borrowed funds was used to buy risky assets (stocks, real estate, bonds, etc). That buying jacked prices higher. And as prices went higher, people borrowed more to exploit the seemingly virtuous cycle.

But credit induced expansions are always 'crack-up booms.' At some point prices reverse, and the value of all assets declines. Over the past couple of years we have seen precisely this. Commonly referred to as 'the credit crisis,' the situation is one of insolvency. Asset values decline; liabilities don't. When asset values fall below liability values, then we have insolvency. Even if all the assets are sold at this point, what is owed cannot be covered by the proceeds.

This is the downside of leverage.

To stave off insolvency, governments have been borrowing more and using the proceeds to buy risky assets (such as bonds) directly, or indirectly by penalizing saving. Hopefully you can see the insanity of this. Borrowing drives liabilities ever higher, which intensifies the insolvency condition.

Presently, bureaucrats are resorting to 'monetizing debt,' which currently is taking the form of issuing more debt and buying it with printed money. While this seems inflationary, debt is still part of the picture.

And as long as debt remains central to all remedies, then the dominant underlying force is deflationary rather than inflationary.

position in Treasuries