The Collapse Of Debt

Government debt exploded over the past decade. Globally, it now stands at 322% of GDP. Compared to the 2008 financial crisis, debt is now 40% higher ($87 trillion).

With the economy heading into a tailspin, we are faced with a situation where defaults are going to explode. For many, we are looking at a sovereign debt crisis like we never saw before.

Unlike countries which print their own money, states and municipalities are stuck trying to reconcile their finances without the money printing press.

Source

Sovereign debt default rates are going to start to rise rapidly. With tax revenues taking a hit, budget shortfalls are going to widen. The recent negotiations within the EU show there is still major divide between countries, especially the northern ones compared to the south.

Financial markets are dependent upon confidence. Without it, there is collapse. Debt was racked up to such a great degree that confidence is going to dwindle. We are already seeing it happening in markets.

Going into 2021, we are going to see a major shift away from public investment into private markets. With bonds on the out, we will likely see a lot of money flow into the markets. Municipal and other sovereign debt will simply be unattractive to investors.

The EU is already facing this. Since 2014, the Eurozone has set interest rates at negative. This was done in an effort to get money flowing to stimulate the economy. With a growth rate of only about 1%, it shows that it has not worked very well.

Many are worried about hyperinflation due to the money printing by central banks across the world. The challenge with this is that in a debt crisis, inflation is impossible. Instead, it is deflation that is the major concern. As defaults mount, investors will feel even less confident in governments.

Source

This is a situation that was arising over a long period of time. Countries have tried to paper over their issues with massive debt. The simple fact is growth has not kept up with the promises made. Spending ended up out of control. Even a country like China, which had outstanding growth over the last few decades, saw its debt to GDP surpass 300%.

The flow of capital is going to tell the entire story as always. We saw a lot of money flow into bonds over the past few decades, in large part due to the idea of diversification of portfolios. Sadly, many who are holding government debt will find themselves on the short end of the trade as many bonds go belly up.

We are witnessing an interesting situation where both the stock market and gold is rising in tandem. Both are near all time highs which shows that, in this environment, gold is not an alternative to stocks. Over the next few years, albeit for different reasons, we could see both markets running. Stocks will benefit from the move out of bonds while gold will follow other commodities higher as a result of a shift in supply and demand.

In the end, however, tens of trillions of dollars worth of debt is going to collapse, much of it to worthless. This is really going to put pressure on credit markets as all of this unravels.

With credit tightening so much, central banks will have to keep the spigots going in a vain attempt to keep things from collapsing. They will fail but it is the only option they have.

---

If you found this article informative, please give an upvote and rehive.

gif by @doze

Posted Using LeoFinance