The Day the Universe Changed

Long time readers know that James Burke and "Connections I and II influenced my mind set. In an early chapter called "Credit Where its Due" Burke showed that cultural and social change in attitude toward credit led to the Industrial Revolution. Rejecting the Puritanical notion of "Neither a borrower nor a lender be" was critical to human advancement. The present political debate never addresses a fact market participants understand: This is the counter-party risk of the crisis. To the extent the "solution" to the socialized credit experiment was to swap balance sheet with the government, a vast amount of the fiscal debate is the other side of that swap.

Several journalists have picked up on the debt ceiling vote as a TARP-like event. (The original "No" vote re-ignited the meltdown and ensured the bailout.)Few have drawn the line between the two. As we have stated before, the US "refunds" (we are this week as usual) others "reschedule", that's the distinction. The EU attempt to live somewhere in between is futile. When certain populist commentators rant about not raising the limit, they should just say, "I think we should default." Since interest is paid by issuance of a like security and the Fed, China and Japan are the largest holders...why not default?

Thus, we have come to one of the junctures Burke identifies as critical. NO post Industrial Revolution advancement in socio-economic activity has occurred without the availability of and consumption of credit. A fair amount of politicians and the public are advocating serious retrenchment without understanding this fact. We are making no value judgment here. We are merely pointing out that equity market buoyancy is discounting a continued genuflection to the "credit gods" that may be ending. You can't crowd out what isn't there on the demand side and you can't crowd in the over stuffed. The day the universe changes is heading our way.

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