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With corporate profits at an all-time high, it's nice to see the debt markets returning to sanity. As previously corporate spreads on junk bonds were about equal, if not below, their long run expected loss rate, the spreads widened over the past month to more reasonable levels. Today the Chrysler deal didn't get funded, and the WSJ reports several big buyouts failed, and several high profile IPOs have quickly underperformed. As Hayek, and von Mises's credit cycle model was predicated on a misalignment in the structure of production based on the creation of money that made capital 'too cheap', I think this sort of thing may be very helpful in prolonging this expansion, or at least dampening a recession's severity. It is important for prices to correctly allocate capital, and previous debt prices were allocating too much capital to bad investments.

With the US auto industry facing severe competition from Japan, and not making any money on cars well into this expansion, I would want to see some real changes before throwing debt at this sinkhole. The fact that Cerberus can't find enough suckers to buy debt to finance their takeover implies that positive changes will be made sooner, because if you give them more cash, they will just burn it, prolonging the inevitable. Debt holders have typically played along, greedy at the chance for seemingly fat coupons, when in fact they are promised little upside and all the downside.

Of course, this could presage a recession, but with corporate profits as high as they are, it would be a small one. As the best investments are often the ones not made, lets hear it for a more sober capital markets environment.