Sep 042011

I get a headache thinking about how much money Uncle Sam is borrowing — in the past year at the rate of almost $42 million a second (hat tip to the Financial Times blog Alphaville for calling this debt graphic to my attention).

Think the U.S. is an outlier? Guess again. Advanced economies everywhere are borrowing like crazy.

At the Kansas City Fed’s annual Jackson Hole Economic Policy Symposium last month, Cornell’s Eswar S. Prasad presented a paper showing debt of advanced economies has nearly doubled ($18 trillion to $30 trillion) in five years and is set to rise by a third (to $40 trillion) in the next five. The first period included the Financial Panic of 2008 and its aftermath, which caused rich countries to go into hock to rescue their banks and to try to stimulate their depressed economies. The next five will feature the continued retirement of baby boomers, which will require big increases in public spending for health care and Social Security benefits in the U.S. and similar payments in other rich countires.

That means headaches for taxpayers everywhere. But if you are a dealer in government bonds, helping investors buy and sell, what’s not to like? Here’s what Cantor Fitzgerald CEO Howard Lutnick told the Financial Times:

You read the news about all the fiscal irresponsibility of all these governments, and you knew someone would be happy, right?
Now you’ve met the person who’s happy.

Cantor Fitzgerald was nearly wiped out on 9/11; it lost 658 employees in the attack on the World Trade Center. The firm has rebounded. It now has 1,500 employees in New York and is highly profitable.

Lutnick has a sense of wonder about conditions in today’s bond market. Here’s another excerpt from an interview printed in the European edition of the Financial Times on the U.S. holiday, Monday, September 6:

It’s extraordinary. Quantitative easing as a concept is staggeringly unusual. You have the lowest interest rates of our lifetime and instead of governments issuing bonds to real buyers, they issue them and buy them themselves and finance them overnight. So they’re really not putting the supply of bonds out there. We’ve turned $1,000bn [that’s $1 trillion in Financial Times-speak] of US debt into overnight money, and, of course, Europe is doing the same thing.

The piper will eventually have to be paid, of course. Just make sure you have a seat when the music stops.

Lutnick told his interviewer that Cantor Fitzgerald doesn’t trade for its own account. It doesn’t care whether the market goes up or down, it makes money strictly on volume. Government bonds, nice business these days, and for the foreseeable future.

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