Wednesday, January 18, 2012

The Japanese Debt Model

A few days ago Twitter must-follow BarbarianCap commented on the rising trend in unfunded union pension obligations.

So then I start to wonder:

If, rather than diversify for the sake of diversification, a union were to use its pension strictly for purchasing its parent company's secured debt;

then a more direct system of accountability would be in place [access to financials, corporate leadership],
then it would always have control over the deployment of company cash [loan covenants],
then legacy liabilities would be better protected [by priority and security of operating assets],
then employees would always have "skin in the game,"
then the market would be forced to take unsecured risk.

Then I start to think about the Japanese debt model whereby its citizens hold most of its country's paper.

Then I say to myself, that is exactly what is going on in the world.  While China and Russia move large volumes of US debt (zerohedge), yields continue to plunge.  So while it may not be clear at first blush who owns all this debt, the only obvious answer is that the Fed must be purchasing it with its thinly veiled broker / front operation Pimco, and all their $1.3T AUM.

Then I see these videos on ibankcoin about the ESF, and further consider what the ECB is doing through the EFSF.

Is this good or bad?  Could the same supposed benefits of a union pension funding its parent company be achieved on a scale as large as the US and Europe?  Is it right to try?  Who can say, but if there's one lesson that we learn, then forget, then learn again, it is that Confidence is a cruel mistress, indeed.