Some of that rise is due to a violent reversal of a bubble mania flight to bonds worldwide immediately after Brexit. Some of it is that Trump has spoken the most obvious truth in the world: that interest rates have to rise from zero and negative levels. Since Trump's election, interest rates have risen significantly.
Central banks around the world have also begun to hint that QE will end in the future. The US Federal Reserve has vowed to raise Fed Funds rate to 0.75% in December.
All of these extremely low "emergency" rates had to end at some point since NIRP and especially ZIRP is killing banks, retirees, pension funds, insurance companies and capitalism itself. Even the educated-idiots, who occupy our institutions and central banks, could see this (finally). It's insane and never been seen in 5000 years of history! Now the same investor front-running that drove $11 Trillion in debt to negative interest rates has now begun to reverse. The front-running was investors "getting ahead" of the Central Bank buying of bonds during QE. That's likely reversing now.
Rates may also be rising because Trump has signaled significantly more debt spending. I think we're seeing the dynamic that higher debt equates to rising rates. If so, rising rates will slow an already slowing world economy. We're seeing the end of debt's utility to create growth as shown in the following graph:
|Debt Saturation Means Debt Begins to Hurt The Economy. China is now in a similar position|
|The End of China's Debt Bubble Is Near|
To build on my blog post "We're Reaching the End of Road," here's the dynamics that could lead to a significant downward financial and economic spiral:
- Slowing economy causes rising government debt (has been true for decades due, in part, to persistent trade deficits)
- Suddenly the prospect of rising debt is, in part, causing rates to rise in US
- Rising rates cause US dollar strength which hurts the emerging market/commodity producing countries
- Rising rates also hurt business, mortgage and consumer loans, Economy slows further into contraction
- Slow growth causes debt distress in corporate world and corporate rates rise further. Debt distress in sovereign debt of commodity-producing countries causes their rates rise further
- Debt distress turns into debt defaults
- Defaults hurt the banking sector that is already teetering on the edge of default, especially in the EU.
- Financial crises risk a repeat of 2008 financial crisis; or even worse
- Debt defaults and banking crises lead to recession, then Depression