Executive Summary

• How sovereign debt is becoming larger and more mis-priced each year
• Why corporate borrowing is accelerating, but only being used for non-productive means
• Junk bonds have never been priced so low (ever), indicating a complete denial of risk
• Today's record bond prices are supported by near-historic low (i.e. extremely tenuous) levels of volume
• Why, mathematically, nearly no-one will be able to exit unscathed when this overinflated market rolls over

If you have not yet read Is Part 1: I Blame The Central Banks available free to all readers, please click here to read it first.

Italy: Insanity On Display

Let’s look at one of the sovereign entities that has piled on the debt to staggering levels. In this case: Italy.

This can serve as a template for understanding the rest of the insanity that exists in the global sovereign bond market.

The rules for lending to a nation should be roughly the same as lending to an individual. You’ve got some measure of the country's credit-worthiness that needs to be taken into account, plus an assessment of its income.

After all, the future principal and interest payments have to come from future income. If there’s too much debt compared to income, then there’s an increasing risk that the debt servicing payments not only will not be made, but cannot be made.

Italy’s sovereign debt has been expanding enormously as the government borrows and spends. Its national debt finally cleared more than $2 trillion euros early in 2014:

Italy's public debt hits record 2.1072 trillion euros

Apr 14, 2014

(ANSAmed) – ROME, APRIL 14 – Italy's massive public debt hit a record 2.1072 trillion euros in February, the central bank reported Monday. The amount was up 17.5 billion euros since January, the Bank of Italy said.

The European Commission has criticized Italy's 2014 budget for not doing enough to bring down debt, around 132% of gross domestic product (GDP).

As a result it has put Italy under "specific monitoring" over its "excessive macroeconomic imbalances", which include high debt and poor competitiveness, as part of an in-depth review.