Deflation, Of Which There Is None
Accompanying the recent plunge to new lows in Treasury yields was stunning news about the boom-era crop of junk bonds. No less than 40% of the speculative-grade debt issued between the start of 1997 and the end of 1999 has already gone into default, according to Fitch Ratings. Michael Lewitt, longtime investor in the junk market (he is general counsel and chief operating officer of Harch Capital Management, Boca Raton, Fla.), predicts that the ultimate rate of default will top 60%. In the three years ended in 1999, more than $100 billion of junk was sold. The United States has been, is now and will likely remain a nation of debtors. It's in the national DNA. At the latest reading, i.e., the second quarter's, it took $2.90 of incremental total borrowing to achieve $1 in GDP growth--a post-1958 record. To a debtor, nothing is so inconvenient as a rise in the value of the money he or she has contracted to repay. In their role as consumers, Americans naturally want a dollar that buys more and more. Yet, in their capacity as debtors, the same Americans prefer a dollar that buys less and less. If the troubles of the corporate bond market are a reliable indicator, the debtors' needs are becoming paramount. Following is an exploration of deflation, a monetary phenomenon not only inconvenient but also improbable (and to date, invisible). It is an overblown worry, in our opinion. The risks it poses to invested capital are lower by far than those presented by the tiny government bond yields that resurface during periodic deflation scares.
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