But absolute debt levels are only part of the story. We must also – and more importantly – consider borrowers’ ability to repay. Today, unprecedented fiscal and monetary stimulus is keeping the liquidity tap open for firms through bond markets and bank loans. Borrowing costs are very favorable, and appear likely to remain so for a long time: we expect benchmark interest rates to remain historically low into 2023. Meanwhile, credit spreads have tightened from their March peak; as it stands, they are more sensitive to business-specific risks than market risks, particularly for the lowest-quality borrowers.
The post worried abut corporate defaults. I worry about a banking crisis.
There is no tap for liquidity, liquidity are coin tosses, the true conserved quantity. The liquidity is not going to regulated banks and the result is unstable tax collection. The regulated banking market shrinks in favor of a greatly expanding shadow banking system. Congress runs out of liquidity and Congress will get sudden stops, for good or ill.
The result is very specific, a mammoth tax dodging scramble in Q1 which could very well result in a lengthy sudden stop in Congress. We have history. We will be unprepared and get another severe dose of Nixon Shock Syndrome, and that lasts a lifetime. Doing the Full Nixon now would be a disaster, we need to shoot for the Half Nixon.
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