The Beginning of the End of the $100 TRILLION Bond Bubble

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The Beginning of the End of the $100 TRILLION Bond Bubble (ZeroHedge, Jan 19, 2015):

The big story in the world is the bond bubble.

For over 30 years, sovereign nations, particularly in the West have been buying votes by offering social payments in the form of welfare, Medicare, social security, and the like.

The ridiculousness of this should not be lost on anyone. Politicians, in order to be elected, promise to allocate taxpayer funds on social programs that will benefit said taxpayers down the road (we’re simply talking about social spending, not infrastructure or other costs.

The concept that taxpayers might simply just keep the money to begin with never enters the equation. And because everyone believes that they are somehow spending someone else’s money, they play along.

When you believe that you are spending someone else’s money, it’s very easy to write a blank check, which is precisely what Western nations have been doing for years, promising everyone a safe and secure retirement without ever bothering to see where the money would come from.

When actual bills came due to fund this stuff, Governments quickly discovered that current tax revenues couldn’t cover it… so they issued sovereign debt to make up the difference.

And so the bond bubble was created.

The large banks, that have a monopoly on managing sovereign debt auctions, were only too happy to play along with this. The reasons are as follows:

  1. They can use these alleged “risk-free” assets as collateral to backstop tens of trillions worth of derivatives trades. A $1 million investment in your typical US Treasury can backstop over $15 million worth of derivatives if not more. The profits from the derivatives markets remains a primary source of revenue for the banks.
  1. Sovereign Governments are only too happy to bail out the big banks if the stuff ever hits the fan on the trades that are backstopped by the sovereign debt (see 2006 onwards). Since the banks are the ones holding the sovereign debt, they can always threaten to dump bonds, which would render the whole social welfare Ponzi bankrupt (see what happened in Europe when sovereign bonds collapsed in 2011-2012).
  1. In a debt-based financial system such as the current one, sovereign bonds are the senior most assets in the system. Those who own these in bulk are at the top of the financial food chain in terms of financial, economic, and political clout.

Since it was rarely if ever a problem to issue sovereign debt, Governments kept promising future payments that they didn’t have until we reach today: the point at which most Western nations are sporting Debt to GDP ratios well north of 300% when you consider unfunded liabilities (the social spending programs mentioned earlier).

Now, cutting social spending is usually considered political suicide (after all, the voters put you in office in the first place based on you promising to pay them welfare payments down the road). So rather than default on the social contract made with voters, the political class will simply push to issue MORE debt to finance old debt that is coming due.

The US did precisely this in the fourth quarter of 2014, issuing over $1 trillion in new debt simply to pay back old debt that was coming due.

This is how the bond market becomes a bubble. Between 2000 and today, the global bond market has nearly TRIPLED in size. Today, it’s north of $100 trillion in size. And it’s backstopping over $555 trillion in derivatives trades.

There is literally no easy fix to any of this. The pain will be severe. And so everyone in charge of the important decisions (the political elite, the big banks, and the Central Banks) will push this as far as it can possibly go before taking the inevitable hit.

The fact that Central banks are now openly cutting interest rates to NEGATIVE should tell you how far along we are in terms of funding problems (at these rates, bond holders are PAYING the Government for the right to own bonds). From a baseball analogy we’re in the late 8th, possibly early 9th inning.  When the game ends, the entire mess will collapse. And it will make 2008 look like a joke.

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3 thoughts on “The Beginning of the End of the $100 TRILLION Bond Bubble

  1. None of this is discussed on US media, turned it on to see. Just total crap, the creep on CNBC who embodies all qualities that makes people dislike certain walks of life……..he said we were “only down 17 basis points from the beginning of the year.”

    The FCC wants to arm their employees…. state of the union clap trap that is coming up on MSNBC Obama ass kissing station………Bloomberg all about new cancer drugs……………Aljaz, revenue from pain killers…………… CNBC there are so many buys now…………..NOTHING of value or truth.

    If what you write here is true, soon Social Security payments will be cut along with the negative interest rates, and the elderly and sick will be the first to feel the pain. I think we are in the 9th inning, because the world has turned on us completely. The US has lost its power as the leading world economic power, and the idiots on financial TV act as if none of what you are covering is happening. They breeze through the Chinese market crash in a sentence………
    When a nation broadcasts no truth, it is in real trouble.
    We rose fast, and are falling even faster.

  2. Oh, yeah, the EU plans to tax US Internet companies such as Google, ETC.
    I guess they will blame today’s losses on China……I’ve had enough lies.

  3. For the fun of it, checked the noontime markets. All in the green. Murder trials, new drugs, and other claptrap. Not one word of truth.
    You posted some comment made by someone saying if you had control of all media, you had the people. Napoleon said Louis XVI would never have lost his throne or head had he control over the press…..but you quoted someone more contemporary. Who was it?

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