The Little Book of the Shrinking Dollar: What You Can Do to Protect Your Money Now

Debt Downgrades around the World

The history of sovereign finance is a history of broken promises. Governments are very good at stiffing their creditors.

During the boom phase of a lending cycle, creditors tend to forget this inconvenient truth. They forget that government borrowers are nothing like corporate borrowers. They forget that government revenues derive from confiscation, rather than production.

As a result, during the boom phase, creditors demand much lower interest rates from government borrowers than they do from similarly rated corporate borrowers.

During the bust phase, however, creditors start to remember how dangerous government borrowers can be. They start to remember that when times are tough, governments have a tough time confiscating enough national wealth to repay their bills.

Such is the predicament in which Greece finds itself today. But the Greek government is hardly unique. Greece may be the poster child of distressed sovereign borrowers, but its grim financial predicament is not so different from that of Portugal, Spain, Italy, or a dozen other sovereign borrowers around the globe . . . including the United States.

Now here’s why I’d consider Johnson & Johnson over, say, a 5-year Treasury bond. The cost of insuring a 5-year Treasury note against default is now higher than the price of insuring a 5-year Johnson & Johnson bond against default. These insurance policies are called credit default swaps (CDS). And just like an ordinary insurance policy, the ...