Money Clip

Blog by Matthias Paul Kuhlmey

Matthias Paul Kuhlmey is a Managing Director & Partner at HighTower Advisors, where he serves as wealth manager to High Net Worth and Ultra-High Net Worth Individuals, Family Offices, and Institutions.

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Doctor, Doctor

Wednesday, April 18, 2012

Posted By: Matthias Paul Kuhlmey

Living in most of Europe may be an attractive proposition (forget about the credit crisis for a moment) – after all, isn’t health care and education (for the most part) free? Ever since grasping the nature of this concept, it has simply driven me crazy: “Oh, I have seen three doctors this week … my insurance covers it …” The sad thing about this notion is that the cost will remain in the system – in other words, even though we may not experience the cost “out of pocket,” there surely is a cost to be covered by someone, at some point in time; I think we can agree on this.

Last week, we reported that major Central Banks around the world have expanded their balance sheets quite massively, when compared to respective GDPs, over the past years. Status Quo: 25% for the Japanese and Europeans and about 20% for the good ol’ US and the Brits. If we slap other liabilities on top of those claims  (in the U.S., this would refer to funded Public Debt and rather large unfunded allocations related to Medicare, Social Security, etc.), developed societies have been on a “spending binge,” and are unsustainably indebted; we call it, more tactfully, the Debt Supercycle.

Even though this unfavorable debt trend was already debated decades ago, we really “cranked-up the credit machinery” since 2000. So let’s not fool ourselves:  The cost is in the system, and it has to be absorbed at some point; this is the hard realization for member countries of the EMU and European bank these days. According to a recent report, “good will money” provided by Central Banks is “running on empty.” The price of Credit Default Swaps, instruments to compensate their buyers in the event of a loan default, are indicating that at least four more European nations may face a debt-restructuring, sooner than later.

We know how much our regular readers love our 80s music analogies, and this blog just gives us the perfect segue to yet another. Remember the Thompson Twins? … “Oh, doctor, doctor, can’t you see I’m burning, burning? Oh, doctor, doctor, is this love I’m feeling?” We have an answer – it’s not love – it’s that funny, sinking feeling you get in your stomach when you realize that there’s not enough cash in the bank to pay this month’s credit card bill …

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