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The Sovereign Debt Crisis Is Now Underway

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@taskmaster4450le
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Markets are all about confidence. This is what is most important because it signals the flow of capital. If investors are not confident, money will flow out of that asset.

We are facing a situation where the stock market is taking off in spite of the economic headwinds. Many feel the disconnect is simply because the market is nuts or, worse, because the Fed is printing money. Neither is the case.

The simple fact is that people are losing faith in governments. This means that public debt is going to feel it hard. National debt might hold up fairly well since the money printing will help to alleviate some fears. This does not extend to lower levels of government that have become as addicted to debt as everyone else.

In the United States, this means cities and states are going to come under fire. We already saw some debt defaults taking place with charter school financing.

Defaults are one part of the equation. The other is getting ongoing financing for different projects. We know that municipalities have no fiscal control meaning they are in the habit of spending on whatever they want. If confidence crashes among investors, this means the private capital market will be cut off from them.

This will provide a massive flow of capital from the public arena to the private sector. It is a future that bodes wells for the equity markets over the next decade. As money moves out of government debt, the flow of capital cannot help but to push up equities.

At the core of this is the promises made by governments around the world. One of Europe's problems is with the economy sinking, they simply cannot adhere to all the obligations offered out to the populous over the last couple decades.

Of course, this is not a EU problem only. In the United States, we see public pension funds woefully underfunded in spite of the record stock market. Most question what will happen if the market drops, meaning these funds will be a lot worse off.

How are all these retirees going to have enough to pay out the obligations? The answer is that there will have to be a bailout or cuts will be required.

The trouble with bailouts is the Federal Government does not operate at a surplus either. To pay money out, it needs to issue debt also. For now, the USG can make turn to the Fed but how long can that go on? Eventually, the private markets need to be tapped and they might give public institutions the cold shoulder.

Naturally, the United States is in the best position since it is the reserve currency. The EU, Japan, and Middle Eastern nations are going to have a tough time. Saudi Arabia, for example, is a country that is already having trouble keeping the populous at bay.

One of the biggest side effects of the shutdown due to COVID-19 is the fact that government revenues are shrinking. As economies tank, the tax receipts also plummet. This applies to every level of government. Again, in the United States, state are losing sales tax revenue as industry such as hospitality are almost completely shut down. Cities and counties could face issues as property taxes go unpaid as people have financial issues due to loss of employment. And finally, the Feds lose out on income tax.

Understanding the flow of capital is key to understanding the markets. It tends to explain a great deal of what is going on. Where money flows, movement in a positive direction is found. Of course, money being pulled out will deflate the assets in a particular market.

Markets are internationally based with people from all over the world partaking. They are also holistic in nature, with activities on one side of the world affecting things elsewhere.

They do not operate in isolation.


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