"We Are Looking Down The Barrel Of A Worldwide
Credit Market Crisis That Threatens To Be Absolutely Horrific"
by Michael Snyder
"National governments around the world are collectively more than 100 trillion dollars in debt. The United States accounts for about 35 percent of that total, China accounts for about 16 percent of that total, and Japan accounts for about 10 percent of that total. For a long time, national governments were able to fund their debt binges very cheaply, but now nervous investors are demanding higher interest rates to hold long-term government debt. This is driving up borrowing costs, and it has thrown credit markets around the globe into a state of chaos. If bond yields continue to rise at a very brisk pace, there is a risk that investors could become so nervous that credit markets actually start freezing up. If that were to happen, the entire global financial system would go completely haywire.
Yesterday, I specifically warned that we need to keep “a close eye on Japanese bond yields”.
Today, tepid demand for 20-year Japanese bonds pushed Japanese bond yields into extremely alarming territory…"The Tokyo tremor began on Tuesday, when the government tried to sell 1 trillion yen (£5.2bn) of March 2045 bonds and encountered lacklustre demand. The average bid-to-cover ratio, which measures investor appetite, dropped to 2.5 – the lowest since 2012. The 1.14-point gap between the average and lowest-accepted prices, known as the “tail”, was the longest since 1987. Investors responded by pushing the Japanese government 20-year yield to the highest this century, and the 30-year yield to a record."
This is a monster story. I don’t understand why this isn’t front page news all over the planet. The shaking of the financial system in Japan is unlike anything that we have seen in decades. Of course the U.S. financial system is being shaken as well. Moody’s just downgraded our credit rating, and Treasury bond yields continue to rise…
"The 30-year Treasury bond yield last traded around 5.08%, the highest level going back to October 2023. The benchmark 10-year Treasury note yield traded at 4.59%. Long-dated bonds sold off as traders worried a new budget bill would worsen the U.S. deficit. The measure is expected to pass as lawmakers reach a compromise on state and local tax deductions as investors head into Speaker Mike Johnson’s Memorial Day deadline. Yields spiked even higher after a poor afternoon auction for 20-year debt, raising fears investors may be losing their appetite for funding America’s deficits."
Just like we are witnessing in Japan, investors are quickly losing their appetite for our bonds. We are already spending about a trillion dollars a year just in interest on the national debt, and now our borrowing costs could be headed a lot higher. This is extremely bad news.
One analyst is warning that we have entered a time when “bond traders are willing to punish high-debt nations with large deficits”…“The pressure on both Japanese and US bonds this week is a sign bond traders are willing to punish high-debt nations with large deficits,” says Kathleen Brooks, an analyst at XTB."
In other words, the party is ending. But our politicians in Washington don’t seem to have gotten the memo. The spending bill that is currently going through Congress would add another 20 trillion dollars to the national debt in the years ahead. That is suicidal. We just can’t do that.
We have been able to defy the laws of economics for a long time, but now economic reality is catching up with us in a major way. Needless to say, the Europeans are in the same boat, and Google AI says that their bond yields have been rising as well this month…"European government bond yields have generally increased this month, particularly for longer-dated bonds. For example, TradingView reports that Eurozone government bond yields rose on Wednesday due to oil price increases, with Germany’s 10-year yield up 4 basis points. Over the month, Germany’s 10-year yield has increased by 18 basis points, while the UK’s 10-year yield has increased by 19 basis points."
What we are witnessing is truly a worldwide phenomenon. The global trade war has made everyone very jittery. GDP projections have turned negative all over the planet, and some nations such as Japan have already entered contraction territory. In an environment where global economic activity is slower, that is going to make it even more difficult for national governments to bring in sufficient revenue to service their debts. So investors are demanding higher rates, and that is going to push up borrowing costs. Of course higher borrowing costs will put additional pressure on the finances of national governments.
We could potentially be entering a vicious cycle of higher rates and higher borrowing costs, and that wouldn’t be good for any of us. If interest rates rise too quickly, that could spark a major derivatives crisis. According to Google AI, interest rate derivatives account for “about 80% of the total global OTC derivatives notional outstanding”…
"The global market for interest rate derivatives (IRDs) is a significant portion of the overall derivatives market. At the end of 2023, the notional outstanding for IRDs was approximately $579 trillion. This figure represented about 80% of the total global OTC derivatives notional outstanding, as of mid-year 2023. IRDs, including interest rate swaps, forward rate agreements (FRAs), and options, are used by financial institutions to manage interest rate risk."
A major derivatives crisis would be extremely destructive. For a moment, try to imagine a giant financial tsunami that smashes one enormous financial institution after another with no end in sight. That is what we are potentially facing. For years, I have been warning about the enormous amount of exposure that the largest U.S. banks have to derivatives. But for a long time, it seemed like everything would be just fine. Unfortunately, a day of reckoning is now upon us, and it appears that this crisis could soon get really, really messy.
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Speaking of derivatives...
"$2.5 Quadrillion Disaster Waiting to Happen –
Egon von Greyerz"
by Greg Hunter’s USAWatchdog.com
"There is sufficiency in the world
for Man's need but not for his greed."
- Mahatma Gandhi
"Egon von Greyerz (EvG) stores gold for clients at the biggest private gold vault in the world buried deep in the Swiss Alps. EvG is a financial and precious metals expert. EvG is a former Swiss banker and an expert in risk. He says the risk in the global markets has never been this high.
EvG explains, “Credit has increased dramatically through derivatives. All instruments being issued now by banks, pension funds, stock funds, it’s all synthetic. There is no real underlying payments in anything almost. Therefore, my estimate for derivatives would be at least $2 quadrillion, and I think that is probably conservative. Then, we have debt on top of that of $300 trillion, and we also have a couple hundred trillion dollars of unfunded liabilities. So, we are talking about $2.5 QUADRILLION, and that’s with a global GDP of $88 trillion. So, there is a disaster waiting to happen, and especially because all this created money has created no value whatsoever. I always knew this would collapse, and it’s taken longer than I expected, but I think we are at the end of a major era.
These derivatives, at some point soon, will actually turn into debt. Central banks will have to cover all the outstanding liabilities of the commercial banks as we are seeing now with Credit Suisse, Bank of England and etc. This is going to happen across the board. Whether it’s called derivatives or called debt, as far as I am concerned, it’s the same thing. It will have the same effect on the world financial system, which will be disastrous, of course.”
EvG says the derivative markets were simply a way for financial institutions to carry debt and not show it on their balance sheets. In the end, everything will balance out. EvG goes on to say, “Nobody can repay the debt, and they can’t even pay interest. So, therefore, when the debt implodes, so will the assets that were financed by this debt. So, both sides of the balance sheet have to come down. Whether it comes down by 50%, 75% or 90%, I don’t know. All I think about is risk, and the financial system will not survive in its present form. Central banks only use one kind of medicine, and that is more printed money. Now, you are getting negative returns on printed money. So, that is not going to save anything.
Sadly we are looking at a situation when this system will start to implode. The rich are still rich, but the poor are really poor. Overall in the UK, Germany and most European countries, people don’t have enough money to live. This is a human disaster already. With food costs going up 25% and energy going up the same and gasoline, interest rates and rents, people don’t have enough money, and that is happening now. It’s a human disaster of mega proportions. It’s so sad, and governments will have no chance of doing anything about it. The risk is increasing exponentially, and it is going to get worse.” There is much more in the 43-minute interview.
Join Greg Hunter on Rumble as he goes One-on-One with Egon von Greyerz of Matterhorn Asset Management, which can be found on GoldSwitzerland.com.
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