Friday, November 11, 2016

Uh Oh, Higher Rates Herald Downward Economic Spiral

From Brexit panic lows, interest rates on the 10 year US Treasury bond have gone from 1.35% to 2.1%. And rates are still rising. World rates are rising too.

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:
  1. Slowing economy causes rising government debt (has been true for decades due, in part, to persistent trade deficits)
  2. Suddenly the prospect of rising debt is, in part, causing rates to rise in US
  3. Rising rates cause US dollar strength which hurts the emerging market/commodity producing countries
  4. Rising rates also hurt business, mortgage and consumer loans, Economy slows further into contraction
  5. 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
  6. Debt distress turns into debt defaults
  7. Defaults hurt the banking sector that is already teetering on the edge of default, especially in the EU. 
  8. Financial crises risk a repeat of 2008 financial crisis; or even worse
  9. Debt defaults and banking crises lead to recession, then Depression 
As I've said, we're reaching the end of the road of debt and prosperity. I believe that we are on the precipice of a financial maelstrom that could change history and endanger millions of lives around the world.


Blacklisted said...

Well said! This ever-increasing rise of govt debt, without any intention of ever paying anything back will destroy the world economy, IF WE ALLOW GOVT TO IMPOSE AUSTERITY TO PAY BACK INTEREST TO THEIR BANKSTER DONORS. One of the solutions, after the implementation of short term-limits to eliminate the career politician, must be the restructuring of debt, which includes haircuts and debt-equity swaps. Another solution is to unleash the trillions sitting on the balance sheets of all govts, which can be found in their CAFR's.

Blacklisted said...

CAFR Summary:

In light of the massive property tax increases in Chicago and Dallas to try to save govt pensions, one would thinknthat pensioners and tax payers would be demanding independent audits of CAFR's. Not that I think the unproductive assets sitting on the balance sheets of govt's across the country should be used to pay for something that is unsustainable, like pensions or any cost that grows exponentially.

However, like the trillion that are sitting offshore due to obscene taxes, these assets should be brought home - made available to the private sector, for business creation and improved productivity.

All of these govt CAFR'S make govt's the largest holder of stocks and real estate. Why would we want the most unproductive and corrupt enterprises on the planet managing anything?

Does anyone question why the public knowledge of CAFR'S are more unknown than George Soros?

Walter Burien has most of the CAFR'S on his site -