Drowning in a sea of liquidity.
— Daniel Lacalle (@dlacalle_IA) May 2, 2020
Is the economy facing a liquidity crisis, or a solvency crisis? The distinction will determine how important the Federal Reserve is to returning the economy to health.
In a liquidity crisis, otherwise healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. In a solvency crisis, companies can’t survive no matter how much they can borrow: they need more revenue. The Fed can’t solve that.
Investors don't realise this is a solvency issue and not a liquidity issue. This is a slow march of deflation to the bottom. t.co/HtqXKDngo9
— Stare Decisis (@MsResJudicata) May 2, 2020
Blue-chip U.S. companies are borrowing money at a record pace to make up for their plunging sales. That process is making corporate bonds riskier for investors.Boeing Co., the plane maker, sold $25 billion of bonds on Thursday, the largest offering of the year. Coca-Cola Co. issued $6.5
Michael Lewis’s “The Big Short” told the story of CDOs, now infamous debt securities that played a starring role in the last financial crisis. This time around their cousins could be thrust center stage.