The U.S. government is $40,068,807,991,924.84 in debt, and all of a sudden the rest of the world has become a lot more hesitant to lend us money. Bond prices are crashing and rates are spiking. For years, I warned that our politicians were borrowing and spending way too much money. But those politicians just kept voting for budgets with bigger and bigger deficits.
Now we find ourselves in the middle of a financial nightmare with no way out. The same thing could be said about Japan and most nations in Europe. Globally, bond prices have been steadily plummeting as bond yields have skyrocketed. Unfortunately for all of us, financial institutions all over the planet are holding gigantic mountains of government bonds that have collapsed in value. The unrealized losses that they are potentially facing will be off the charts. Meanwhile, rapidly rising interest rates could set off an unprecedented derivatives implosion. At this point, the total notional amount outstanding for global over-the-counter interest rate derivatives is well over 600 trillion dollars.
As long as investors still had faith in the game, everything was going to be fine.
But now investors are losing faith in the U.S. government, the Japanese government and governments all over Europe, because they have been borrowing money at insanely reckless levels.
So now we have a massive crisis on our hands, and last week things really started to get out of hand.
In fact, last week was definitely “a week of pain” for financially irresponsible governments throughout the world…
This has been a week of pain for anyone who borrows money.
All over the world, lenders are demanding higher interest rates. The global bond market is extracting higher yields from every borrower, starting with the biggest borrowers of all: national governments. But not every government is paying equally.
Trustworthy borrowers with solid finances and honest leadership pay less. Distrusted borrowers with disordered finances and corrupt leaders pay more. In times past, the United States would have headed that first list.
In a previous article, I explained that historically when the yield on 10 year U.S. Treasuries hits 5.25 percent things start to get really crazy.