I have many friends majoring in economics who, for lack of words to put it in a better way, live to work for Morgan Stanley or Goldman Sachs. Too bad the cost to protect their debt has soared to the highest levels since Lehman’s collapse.
I have posted in many instances explanations and consequences of the European debt crisis, but let me condense it into one simple chain of events:
European sovereign debt rises –> borrowing costs go up –> companies with debt suffer –> growth stagnates, pushing us further towards a double dip –> European sovereign debt rises
Very sad and depressing cycle. Now that financial firms with leverage are hit, their increasing borrowing costs but lack of revenue growth will, at the very best, merely cripple their growth 3 years down the line. I believe my friends who want to work at MS or GS will only get more and more depressed. That’s just what I think anyways. The problem with downward cyclical cycles like this one, is that while slowly spiraling down is painful, taking a big sacrifice on the short-term is necessary to exit the downward cycle. Resistance to reducing leverage and capital requirements will, unfortunately, doom the banks themselves. We will see, though. The Fed is out of money, the European Union is almost out of money, and all major corporations with debt are struggling to survive.
This, now, is a scary thought, because most companies issue a lot of debt. Save a few corporations like Apple with a lot of cash on their balance sheets, most companies (especially, especially financial service firms) are fueling faster growth with debt. I know it’s easy to say on hindsight that it was “risky”, but I believe it may be time to reevaluate what exactly is “sustainable growth.” I still believe in debt and the spirit of Alexander Hamilton, but debt is nearing unsustainable levels. While I personally don’t have a model to determine when it would be unsustainable, I believe it would be as obvious as the Great Depression as it happens.
I mentioned this a long time ago when the European debt crisis was playing out on Obama’s birthday, but doesn’t it scare you that we are slowly losing the amount of credit available in the market? It seems as though credit in the market is tightening up, and we may descend into a painful double dip quite similar to the Great Depression. Will it be as bad as the Great Depression given a “worst case scenario”? I will discuss this in my next post.