As we enter the second half of 2015, financial panic has gripped most of the globe. Stock prices are crashing in China, in Europe and in the United States. Greece is on the verge of a historic default, and now Puerto Rico and Ukraine are both threatening to default on their debts if they do not receive concessions from their creditors. Not since the financial crisis of 2008 has so much financial chaos been unleashed all at once. Could it be possible that the great financial crisis of 2015 has begun? The following are 16 facts about the tremendous financial devastation that is happening all over the world right now…
1. On Monday, the Dow fell by 350 points. That was the biggest one day decline that we have seen in two years.
2. In Europe, stocks got absolutely smashed. Germany’s DAX index dropped 3.6 percent, and France’s CAC 40 was down 3.7 percent.
3. After Greece, Italy is considered to be the most financially troubled nation in the eurozone, and on Monday Italian stocks were down more than 5 percent.
4. Greek stocks were down an astounding 18 percent on Monday.
5. As the week began, we witnessed the largest one day increase in European bond spreads that we have seen in seven years.
6. Chinese stocks have already met the official definition of being in a “bear market” – the Shanghai Composite is already down more than 20 percent from the high earlier this year.
7. Overall, this Chinese stock market crash is the worst that we have witnessed in 19 years.
8. On Monday, Standard & Poor’s slashed Greece’s credit rating once again and publicly stated that it believes that Greece now has a 50 percent chance of leaving the euro.
9. On Tuesday, Greece is scheduled to make a 1.6 billion euro loan repayment. One Greek official has already stated that this is not going to happen.
10. Greek banks have been totally shut down, and a daily cash withdrawal limit of 60 euros has been established. Nobody knows when this limit will be lifted.
11. Yields on 10 year Greek government bonds have shot past 15 percent.
12. U.S. investors are far more exposed to Greece than most people realize. The New York Times explains…
But the question of what happens when the markets do open is particularly acute for the hedge fund investors — including luminaries like David Einhorn and John Paulson — who have collectively poured more than 10 billion euros, or $11 billion, into Greek government bonds, bank stocks and a slew of other investments.
Through the weekend, Nicholas L. Papapolitis, a corporate lawyer here, was working round the clock comforting and cajoling his frantic hedge fund clients.
“People are freaking out,” said Mr. Papapolitis, 32, his eyes red and his voice hoarse. “They have made some really big bets on Greece.”
13. The Governor of Puerto Rico has announced that the debts that the small island has accumulated are “not payable“.
14. Overall, the government of Puerto Rico owes approximately 72 billion dollars to the rest of the world. Without debt restructuring, it is inevitable that Puerto Rico will default. In fact, CNN says that it could happen by the end of this summer.
15. Ukraine has just announced that it may “suspend debt payments” if their creditors do not agree to take a 40 percent “haircut”.
16. This week the Bank for International Settlements has just come out with a new report that says that central banks around the world are “defenseless” to stop the next major global financial crisis.
Without a doubt, we are overdue for another major financial crisis. All over the planet, stocks are massively overvalued, and financial markets have become completely disconnected from economic reality. And when the next crash happens, many believe that it will be even worse than what we experienced back in 2008. For example, just consider the words of Jim Rogers…
“In the United States, we have had economic slowdowns every four to seven years since the beginning of the Republic. It’s now been six or seven years since our last stock market problem. We’re overdue for another problem.”
In Rogers’ view, low interest rates caused stock prices to increase significantly. He believes many assets are priced beyond their fundamentals thanks to the ultra-easy monetary policies by the Federal Reserve. Fed supporters argue such measures are good for investors, but Rogers takes a different view.
“The Fed might tell us we don’t have to worry and that a correction or crash will never happen again. That’s balderdash! When this artificial sea of liquidity ends, we’re going to pay a terrible price. When the next economic problem occurs, it will be much worse because the debt is so much higher.”
Of course Rogers is far from alone. A recent article by Paul B. Farrell expressed similar sentiments…
America’s 95 million investors are at huge risk. Remember the $10 trillion losses in the crash and recession of 2007-2009? The $8 trillion lost after the dot-com technology crash and recession of 2000-2003? This is the third big recession of the century. Yes, America will lose trillions again.
Especially with dead-ahead predictions like Mark Cook’s 4,000-point Dow correction. And Jeremy Grantham’s warning of a 50% crash around election time, with negative stock returns through the first term of the next president, beyond 2020. Starting soon.
Why is America so vulnerable when the next recession hits? Simple: The Fed’s cheap-money giveaway is killing America. When the downturn, correction, crash hits, it will compare to the 2008 crash. The Economist warns: “the world will be in a rotten position to do much about it. Rarely have so many large economies been so ill-equipped to manage a recession,” whatever the trigger.
Things have been relatively quiet in the financial world for so long that many have been sucked into a false sense of security.
But the underlying imbalances were always there, and they have been getting worse over time.
I believe that we are heading into a global financial collapse that will make what happened in 2008 look like a Sunday picnic by the time it is all said and done.
Global debt levels are at all-time highs, big banks all over the planet have been behaving more recklessly than ever, and financial markets are absolutely primed for a huge crash.
Hopefully things will calm down a bit as the rest of this week unfolds, but I wouldn’t count on it.
We have entered uncharted territory, and what comes next is going to shock the world.
The Greek financial system is in the process of totally imploding, and the rest of Europe will soon follow. Neither the Greeks nor the Germans are willing to give in, and that means that there is very little chance that a debt deal is going to happen by the end of June. So that means that we will likely see a major Greek debt default and potentially even a Greek exit from the eurozone. At this point, credit default swaps on Greek debt have risen 456 percent in price since the beginning of this year, and the market has priced in a 75 percent chance that a Greek debt default will happen. Over the past month, the yield on two year Greek bonds has skyrocketed from 20 percent to more than 30 percent, and the Greek stock market has fallen by a total of 13 percent during the last three trading days alone. This is what a financial collapse looks like, and if Greece does leave the euro, we are going to see this kind of carnage happen all over Europe.
Officials over in Europe are now openly speaking of the need to prepare for a “state of emergency” now that negotiations have totally collapsed. At one time, it would have been unthinkable for Greece to leave the euro, but now it appears that this is precisely what will happen unless a miracle happens…
Greece is heading for a state of emergency and an exit from the euro following the collapse of talks to agree a bailout deal, senior EU officials warned last night.
Europe must be prepared to step in otherwise Greek society would face an unprecedented crisis with power blackouts, medicine shortages and no money to pay for police, they said.
In the past, the Greeks have always buckled under pressure. But this new Greek government was elected with a mandate to end austerity, and so far they have shown a remarkable amount of resolve. In order for a debt deal to happen, one side is going to have to blink, and at this point it does not look like it will be the Greeks…
The world’s financial markets are facing up to the possibility that Greece could soon become the first country to crash out of Europe’s single currency. Talks between Athens and its eurozone creditors have collapsed in acrimony just days before a final deadline for Greece to unlock the €7.2bn (£5.2bn) in bailout funds it needs to avoid a catastrophic debt default.
The Greek Prime Minister, Alexis Tsipras, accused the creditor powers of hidden “political motives” in their demands that Greece make further cuts to public pension payments in return for the financial aid. “We are shouldering the dignity of our people, as well as the hopes of the people of Europe,” Mr Tsipras said in a defiant statement. “We cannot ignore this responsibility. This is not a matter of ideological stubbornness. This is about democracy.”
As we approach the point of no return, both sides are preparing for the endgame.
In Greece, members of parliament have been studying what happened in Iceland a few years ago. Many of them believe that a Greek debt default combined with a nationalization of Greek banks and a Greek exit from the euro could set the nation back on the path to prosperity fairly rapidly. The following comes from the Telegraph…
The radical wing of Greece’s Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe’s creditor powers.
Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.
The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or ‘Left Platform’, as well as other hard-line groupings in Syriza’s spectrum. It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be.
Meanwhile, in a desperate attempt to get the Greeks to give in at the last moment, Greek’s creditors are preparing to pull out all the stops in order to put as much financial pressure on Greece as possible…
Germany’s Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.
For a long time, most in the financial world assumed that a debt deal would eventually happen. But now reality is setting in. As I mentioned at the top of this article, the cost to insure Greek debt has risen by an astounding 456 percent since the beginning of this year…
Given these dramatic stakes, the risk of a Greek default has gone way up. One way to measure that risk is by looking at the skyrocketing price of insurance policies that would pay out if Greek bonds go bust. The cost to insure Greek debt for one year against the risk of default has skyrocketed 456% since the start of the 2015, according to FactSet data.
These insurance-like contracts, known as credit default swaps, imply there is a 75% to 80% probability of Greece defaulting on its debt, according to Jigar Patel, a credit strategist at Barclays.
The probability of a Greek default soars to a whopping 95% for five-year CDS, Patel said.
“Default is looking more and more likely,” Peter Boockvar, chief market analyst at The Lindsey Group, wrote in a note to clients on Tuesday.
And in recent days, we have also seen Greek stocks and Greek bonds totally crash. The following comes from CNN…
The Greek stock market has plummeted 13% over the past three trading days, including a 3% drop on Tuesday alone.
In the bond market, the yield on Greek two-year debt has skyrocketed to 30.2%. A month ago, the yield was only 20%. Yields rise as bond prices fall.
Of course if there is a Greek debt default and Greece does leave the euro, it won’t just be Greece that pays the price.
As I have written about previously, there are tens of trillions of dollars in derivatives that are directly tied to currency exchange rates and 505 trillion dollars in derivatives that are directly tied to interest rates. A “Grexit” would cause the euro to drop like a rock and interest rates all over the continent would start to go crazy. The financial chaos that a “Grexit” would cause should not be underestimated.
And there are signs that some of Europe’s biggest banks are already on the verge of collapse. For example, just consider what has been going on at the biggest bank in Germany. Both of the co-CEOs at Deutsche Bank recently resigned, and it is increasingly looking as if it could soon become Europe’s version of Lehman Brothers. The following summary of the recent troubles at Deutsche Bank comes from an article that was posted on NotQuant…
Here’s a re-cap of what’s happened at Deutsche Bank over the past 15 months:
- In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure. Why?
- 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of 8 billion euros worth of stock – at up to a 30% discount. Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
- Fast forwarding to March of this year: Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
- In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
- In May, one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors. We guess that this is a “crisis move”. In times of crisis the power of the executive is often increased.
- June 5: Greece misses it’s payment to the IMF. The risk of default across all of it’s debt is now considered acute. This has massive implications for Deutsche Bank.
- June 6/7: (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
- June 9: S&P lowers the rating of Deutsche Bank to BBB+ Just three notches above “junk”. (Incidentally, BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)
And that’s where we are now. How bad is it? We don’t know because we won’t be permitted to know. But these are not the moves of a healthy company.
For a very long time, I have been warning that a major financial crisis was coming to Europe, and for a very long time the authorities in Europe have been able to successfully kick the can down the road.
But now it looks like we have reached the end of the road, and a day of reckoning is finally here.
Nobody is quite sure what is going to happen next, but almost everyone agrees that it isn’t going to be pretty.
So you better buckle up, because it looks like we are all in for a wild ride as we enter the second half of this year.
All over the planet, large banks are massively overexposed to derivatives contracts. Interest rate derivatives account for the biggest chunk of these derivatives contracts. According to the Bank for International Settlements, the notional value of all interest rate derivatives contracts outstanding around the globe is a staggering 505 trillion dollars. Considering the fact that the U.S. national debt is only 18 trillion dollars, that is an amount of money that is almost incomprehensible. When this derivatives bubble finally bursts, there won’t be enough money in the entire world to bail everyone out. The key to making sure that all of these interest rate bets do not start going bad is for interest rates to remain stable. That is why what is going on in Greece right now is so important. The Greek government has announced that it will default on a loan payment that it owes to the IMF on June 5th. If that default does indeed happen, Greek bond yields will soar into the stratosphere as panicked investors flee for the exits. But it won’t just be Greece. If Greece defaults despite years of intervention by the EU and the IMF, that will be a clear signal to the financial world that no nation in Europe is truly safe. Bond yields will start spiking in Italy, Spain, Portugal, Ireland and all over the rest of the continent. By the end of it, we could be faced with the greatest interest rate derivatives crisis that any of us have ever seen.
The number one thing that bond investors want is to get their money back. If a nation like Greece is actually allowed to default after so much time and so much effort has been expended to prop them up, that is really going to spook those that invest in bonds.
At this point, Greece has not gotten any new cash from the EU or the IMF since last August. The Greek government is essentially flat broke at this point, and once again over the weekend a Greek government official warned that the loan payment that is scheduled to be made to the IMF on June 5th simply will not happen…
Greece cannot make debt repayments to the International Monetary Fund next month unless it achieves a deal with creditors, its Interior Minister said on Sunday, the most explicit remarks yet from Athens about the likelihood of default if talks fail.
Shut out of bond markets and with bailout aid locked, cash-strapped Athens has been scraping state coffers to meet debt obligations and to pay wages and pensions. With its future as a member of the 19-nation euro zone potentially at stake, a second government minister accused its international lenders of subjecting it to slow and calculated torture.
After four months of talks with its eurozone partners and the IMF, the leftist-led government is still scrambling for a deal that could release up to 7.2 billion euros ($7.9 billion) in aid to avert bankruptcy.
And it isn’t just the payment on June 5th that won’t happen. There are three other huge payments due later in June, and without a deal the Greek government will not be making any of those payments either.
It isn’t that Greece is holding back any money. As the Greek interior minister recently explained during a television interview, the money for the payments just isn’t there…
“The money won’t be given . . . It isn’t there to be given,” Nikos Voutsis, the interior minister, told the Greek television station Mega.
This crisis can still be avoided if a deal is reached. But after months of wrangling, things are not looking promising at the moment. The following comes from CNBC…
People who have spoken to Mr Tsipras say he is in dour mood and willing to acknowledge the serious risk of an accident in coming weeks.
“The negotiations are going badly,” said one official in contact with the prime minister. “Germany is playing hard. Even Merkel isn’t as open to helping as before.”
And even if a deal is reached, various national parliaments around Europe are going to have to give it their approval. According to Business Insider, that may also be difficult…
The finance ministers that make up the Eurogroup will have to get approval from their own national parliaments for any deal, and politicians in the rest of Europe seem less inclined than ever to be lenient.
So what happens if there is no deal by June 5th?
Well, Greece will default and the fun will begin.
In the end, Greece may be forced out of the eurozone entirely and would have to go back to using the drachma. At this point, even Greek government officials are warning that such a development would be “catastrophic” for Greece…
One possible alternative if talks do not progress is that Greece would leave the common currency and return to the drachma. This would be “catastrophic”, Mr Varoufakis warned, and not just for Greece itself.
“It would be a disaster for everyone involved, it would be a disaster primarily for the Greek social economy, but it would also be the beginning of the end for the common currency project in Europe,” he said.
“Whatever some analysts are saying about firewalls, these firewalls won’t last long once you put and infuse into people’s minds, into investors’ minds, that the eurozone is not indivisible,” he added.
But the bigger story is what it would mean for the rest of Europe.
If Greece is allowed to fail, it would tell bond investors that their money is not truly safe anywhere in Europe and bond yields would start spiking like crazy. The 505 trillion dollar interest rate derivatives scam is based on the assumption that interest rates will remain fairly stable, and so if interest rates begin flying around all over the place that could rapidly create some gigantic problems in the financial world.
In addition, a Greek default would send the value of the euro absolutely plummeting. As I have warned so many times before, the euro is headed for parity with the U.S. dollar, and then it is going to go below parity. And since there are 75 trillion dollars of derivatives that are directly tied to the value of the U.S. dollar, the euro and other major global currencies, that could also create a crisis of unprecedented proportions.
Over the past six years I have written more than 2,000 articles, I have authored two books and I have produced two DVDs. One of the things that I have really tried to get across to people is that our financial system has been transformed into the largest casino in the history of the world. Big banks all over the planet have become exceedingly reckless, and it is only a matter of time until all of this gambling backfires on them in a massive way.
It isn’t going to take much to topple the current financial order. It could be a Greek debt default in June or it may be something else. But when it does collapse, it is going to usher in the greatest economic crisis that any of us have ever seen.
So keep watching Europe.
Things are about to get extremely interesting, and if I am right, this is the start of something big.
The Greek government says that a “moment of truth” is coming on June 5th. Either their lenders agree to give them more money by that date, or Greece will default on a 300 million euro loan payment to the IMF. Of course it won’t technically be a “default” according to IMF rules for another 30 days after that, but without a doubt news that Greece cannot pay will send shockwaves throughout the financial world. At that point, those holding Greek bonds will start to panic as they realize that they might not get paid as well. All over Europe, there are major banks that are holding large amounts of Greek debt and derivatives that are related to the performance of Greek debt. If something is not done to avert disaster at the last moment, a default by Greece could be the spark that sets off a major European financial crisis this summer.
As I discussed the other day, neither the EU nor the IMF have given any money to Greece since August 2014. So now the Greek government is just about out of money, and without any new loans they will not be able to pay back the old loans that are coming due. In fact, things are so bad at this point that the Greek government is openly warning that it will default on June 5th…
Greece cannot make an upcoming payment to the International Monetary Fund on June 5 unless foreign lenders disburse more aid, a senior ruling party lawmaker said on Wednesday, the latest warning from Athens it is on the verge of default.
Prime Minister Alexis Tsipras’s leftist government says it hopes to reach a cash-for-reforms deal in days, although European Union and IMF lenders are more pessimistic and say talks are moving too slowly for that.
Of course this is all part of a very high stakes chess game. The Greeks believe that the Germans will back down when faced with the prospect of a full blown European financial crisis, and the Germans believe that the Greeks will eventually be feeling so much pain that they will be forced to give in to their demands.
So with each day we get closer and closer to the edge, and the Greeks are trying to do their best to let everyone know that they are not bluffing. Just today, a spokesperson for the Greek government came out and declared that unless there is a deal by June 5th, the IMF “won’t get any money”…
Greek officials now point to a race against the clock to clinch a deal before payments totaling about 1.5 billion euros ($1.7 billion) to the IMF come due next month, starting with a 300 million euro payment on June 5.
“Now is the moment that negotiations are coming to a head. Now is the moment of truth, on June 5,” Nikos Filis, spokesman for the ruling Syriza party’s lawmakers, told ANT1 television.
“If there is no deal by then that will address the current funding problem, they won’t get any money,” he said.
But the Germans know that the Greeks desperately need more money and can’t last much longer. The Greek banking system is so close to collapse that Moody’s just downgraded it again and warned that “there is a high likelihood of an imposition of capital controls and a deposit freeze” in the months ahead…
The outlook for the Greek banking system is negative, primarily reflecting the acute deterioration in Greek banks’ funding and liquidity, says Moody’s Investors Service in a new report published recently. These pressures are unlikely to ease over the next 12-18 months and there is a high likelihood of an imposition of capital controls and a deposit freeze.
The new report: “Banking System Outlook: Greece”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
Moody’s notes that significant deposit outflows of more than €30 billion since December 2014 have increased banks’ dependence on central bank funding. In our view, the banks are likely to remain highly dependent on central bank funding, as ongoing uncertainty regarding Greece’s support programme continues to compromise depositors’ confidence.
Unfortunately, when things really start going crazy in Greece people might be faced with much more than just frozen bank accounts. As I wrote about just a few days ago, there is a very strong possibility that we could actually see Cyprus-style wealth confiscation implemented in Greece when the banks collapse.
In fact, the Greek government is already talking about the possibility of a special tax on banking transactions…
Athens is promoting the idea of a special levy on banking transactions at a rate of 0.1-0.2 percent, while the government’s proposal for a two-tier value-added tax – depending on whether the payment is in cash or by card – has met with strong opposition from the country’s creditors.
A senior government official told Kathimerini that among the proposals discussed with the eurozone and the International Monetary Fund is the imposition of a levy on bank transactions, whose exact rate will depend on the exemptions that would apply. The aim is to collect 300-600 million euros on a yearly basis.
Fee won’t include ATM withdrawals, transactions up to EU500; in this case Greek govt projects EU300m-EU600m annual revenue from measure.
Sadly, most people living in North America (which is most of my audience) does not really care much about what happens on the other side of the world.
But they should care.
If Greece defaults and the Greek banking system collapses, stocks and bonds will crash all over Europe. Many believe that such a crash can be “contained” to just Europe, but that is really just wishful thinking.
In addition, the euro would plummet dramatically, which would cause substantial financial problems all over the planet. As I recently explained, the euro is headed to parity with the U.S. dollar and then it is going to go below parity. Before it is all said and done, the euro is going to all-time lows.
Of course the U.S. dollar is eventually going to totally collapse as well, but that comes later and that is a story for another day.
According to the Bank for International Settlements, 74 trillion dollars in derivatives are directly tied to the value of the euro, the value of the U.S. dollar and the value of other global currencies.
So if you believe that what is happening in Greece cannot have massive ramifications for the entire global financial system, you are dead wrong.
What is happening in Greece is exceedingly important, and it is time for all of us to start paying attention.
Get ready for another major worldwide credit crunch. Today, the entire global financial system resembles a colossal spiral of debt. Just about all economic activity involves the flow of credit in some way, and so the only way to have “economic growth” is to introduce even more debt into the system. When the system started to fail back in 2008, global authorities responded by pumping this debt spiral back up and getting it to spin even faster than ever. If you can believe it, the total amount of global debt has risen by $35 trillion since the last crisis. Unfortunately, any system based on debt is going to break down eventually, and there are signs that it is starting to happen once again. For example, just a few days ago the IMF warned regulators to prepare for a global “liquidity shock“. And on Friday, Chinese authorities announced a ban on certain types of financing for margin trades on over-the-counter stocks, and we learned that preparations are being made behind the scenes in Europe for a Greek debt default and a Greek exit from the eurozone. On top of everything else, we just witnessed the biggest spike in credit application rejections ever recorded in the United States. All of these are signs that credit conditions are tightening, and once a “liquidity squeeze” begins, it can create a lot of fear.
Over the past six months, the Chinese stock market has exploded upward even as the overall Chinese economy has started to slow down. Investors have been using something called “umbrella trusts” to finance a lot of these stock purchases, and these umbrella trusts have given them the ability to have much more leverage than normal brokerage financing would allow. This works great as long as stocks go up. Once they start going down, the losses can be absolutely staggering.
That is why Chinese authorities are stepping in before this bubble gets even worse. Here is more about what has been going on in China from Bloomberg…
China’s trusts boosted their investments in equities by 28 percent to 552 billion yuan ($89.1 billion) in the fourth quarter. The higher leverage allowed by the products exposes individuals to larger losses in the event of stock-market drops, which can be exaggerated as investors scramble to repay debt during a selloff.
In umbrella trusts, private investors take up the junior tranche, while cash from trusts and banks’ wealth-management products form the senior tranches. The latter receive fixed returns while the former take the rest, so private investors are effectively borrowing from trusts and banks.
Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.
Overall, China has seen more debt growth than any other major industrialized nation since the last recession. This debt growth has been so dramatic that it has gotten the attention of authorities all over the planet…
Wolfgang Schaeuble, Germany’s finance minister says that “debt levels in the global economy continue to give cause for concern.”
Singling out China in particular, Schaeuble noted that “debt has nearly quadrupled since 2007″, adding that it’s “growth appears to be built on debt, driven by a real estate boom and shadow banks.”
According to McKinsey’s research, total outstanding debt in China increased from $US7.4 trillion in 2007 to $US28.2 trillion in 2014. That figure, expressed as a percentage of GDP, equates to 282% of total output, higher than the likes of other G20 nations such as the US, Canada, Germany, South Korea and Australia.
This credit boom in China has been one of the primary engines for “global growth” in recent years, but now conditions are changing. Eventually, the impact of what is going on in China right now is going to be felt all over the planet.
Over in Europe, the Greek debt crisis is finally coming to a breaking point. For years, authorities have continued to kick the can down the road and have continued to lend Greece even more money.
But now it appears that patience with Greece has run out.
For instance, the head of the IMF says that no delay will be allowed on the repayment of IMF loans that are due next month…
IMF Managing Director Christine Lagarde roiled currency and bond markets on Thursday as reports came out of her opening press conference saying that she had denied any payment delay to Greece on IMF loans falling due next month.
Unless Greece concludes its negotiations for a further round of bailout money from the European Union, however, it is not likely to have the money to repay the IMF.
And we are getting reports that things are happening behind the scenes in Europe to prepare for the inevitable moment when Greece will finally leave the euro and go back to their own currency.
For example, consider what Art Cashin told CNBC on Friday…
First, “there were reports in the media [saying] that the ECB and/or banking authorities suggested to banks to get rid of any sovereign Greek debt they had, which suggests that maybe the next step will be Greece exiting,” Cashin told CNBC.
Also, one of Greece’s largest newspapers is reporting that neighboring countries are forcing subsidiaries of Greek banks that operate inside their borders to reduce their risk to a Greek debt default to zero…
According to a report from Kathimerini, one of Greece’s largest newspapers, central banks in Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia have all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk — including bonds, treasury bills, deposits to Greek banks, and loans — down to zero.
Once Greece leaves the euro, that is going to create a tremendous credit crunch in Europe as fear begins to spread like wildfire. Everyone will be wondering which nation will be “the next Greece”, and investors will want to pull their money out of perceived danger zones before they get hammered.
In the past, other European nations have been willing to bend over backwards to accommodate Greece and avoid this kind of mess, but those days appear to be finished. In fact, the finance minister of France openly admits that the French “are not sympathetic to Greece”…
Greece isn’t winning much sympathy from its debt-wracked European counterparts as the country draws closer to default for failing to make bailout repayments.
“We are not sympathetic to Greece,” French Finance Minister Michael Sapin said in an interview at the International Monetary Fund-World Bank spring meetings here.
“We are demanding because Greece must comply with the European (rules) that apply to all countries,” Sapin said.
Yes, it is possible that another short-term deal could be reached which could kick the can down the road for a few more months.
But either way, things in Europe are going to continue to get worse.
Meanwhile, very disappointing earnings reports in the U.S. are starting to really rattle investors.
For example, we just learned that GE lost 13.6 billion dollars in the first quarter…
One week following the announcement that it would dismantle most of its GE Capital financing operations to instead focus on its industrial roots, General Electric reported a first quarter loss of $13.6 billion.
The results were impacted by charges relating to the conglomerate’s strategic shift. A year ago GE reported a first quarter profit of $3 billion.
That is a lot of money.
How in the world does a company lose 13.6 billion dollars in a single quarter during an “economic recovery”?
Other big firms are reporting disappointing earnings numbers too…
In earnings news, American Express Co. late Thursday said its results were hurt by the strong U.S. dollar, which reduced revenue booked in other countries. Chief Executive Kenneth Chenault reiterated the company’s forecast that 2015 earnings will be flat to modestly down year over year. Shares fell 4.6%.
Advanced Micro Devices Inc. said its first-quarter loss widened as revenue slumped. The company said it was exiting its dense server systems business, effective immediately. Revenue and the loss excluding items missed expectations, pushing shares down 13%.
And just like we saw just before the financial crisis of 2008, Americans are increasingly having difficulty meeting their financial obligations.
For instance, the delinquency rate on student loans has reached a very frightening level…
More borrowers are failing to make payments on their student loans five years after leaving college, painting a grim picture for borrowers, according to the Federal Reserve Bank of New York.
Student debt continues to increase, especially for people who took out loans years ago. Those who left school in the Great Recession, which ended in 2009, had particular difficulty with repayment, with many defaulting, becoming seriously delinquent or not being able to reduce their balances, the New York Fed said today.
Only 37 percent of borrowers are current on their loans and are actively paying them down, and 17 percent are in default or in delinquency.
At this point, the American consumer is pretty well tapped out. If you can believe it, 56 percent of all Americans have subprime credit today, and as I mentioned above, we just witnessed the biggest spike in credit application rejections ever recorded.
We have reached a point of debt saturation, and the credit crunch that is going to follow is going to be extremely painful.
Of course the biggest provider of global liquidity in recent years has been the Federal Reserve. But with the Fed pulling back on QE, this is creating some tremendous challenges all over the globe. The following is an excerpt from a recent article in the Telegraph…
The big worry is what will happen to Russia, Brazil and developing economies in Asia that borrowed most heavily in dollars when the Fed was still flooding the world with cheap liquidity. Emerging markets account to roughly half of the $9 trillion of offshore dollar debt outside US jurisdiction.
The IMF warned that a big chunk of the debt owed by companies is in the non-tradeable sector. These firms lack “natural revenue hedges” that can shield them against a double blow from rising borrowing costs and a further surge in the dollar.
So what is the bottom line to all of this?
The bottom line is that we are starting to see the early phases of a liquidity squeeze.
The flow of credit is going to begin to get tighter, and that means that global economic activity is going to slow down.
This happened during the last financial crisis, and during this next financial crisis the credit crunch is going to be even worse.
This is why it is so important to have an emergency fund. During this type of crisis, you may have to be the source of your own liquidity. At a time when it seems like nobody has any cash, those that do have some will be way ahead of the game.
Europe is on the verge of a horrifying financial meltdown, and there are only a few short weeks left to avert total disaster. On Monday, talks that were supposed to bring about yet another temporary “resolution” to the Greek debt crisis completely fell apart. The new Greek government has entirely rejected the idea of a six month extension of the current bailout. The Greeks want a new deal which would enable them to implement the promises that have been made to the voters. But that is not going to fly with the Germans, among others. They expect the Greeks to fulfill the obligations that were agreed to previously. The two sides are not even in the same ballpark at this point, and things are starting to get very personal. It is no secret that the new Greek government does not like the Germans, and the Germans are not particularly fond of the Greeks at this point. But unless they can find a way to work out a deal, things could get quite messy very rapidly. The Greek government has about three weeks of cash left, and any changes to the current bailout arrangement would have to be approved by parliaments all over Europe by March 1st. And the stakes are incredibly high. If there is no deal, we could see a Greek debt default, Greece could be forced to leave the eurozone and go back to the drachma, the euro could collapse to all time lows, all the banks all over Europe that are exposed to Greek government debt could be faced with absolutely massive losses, and the 26 trillion dollars in derivatives that are directly tied to the value of the euro could start to unravel. In essence, if things go badly this could be enough to push us into a global financial crisis.
On Monday, eurozone officials tried to get the Greeks to extend the current bailout package for six months with the current austerity provisions in place. Greek government officials responded by saying that “those who bring this back are wasting their time” and that those negotiating on behalf of the eurozone are being “unreasonable”…
A Greek government official said that a draft text presented to eurozone finance ministers meeting in Brussels on Monday spoke of Greece extending its current bailout package and as such was “unreasonable” and would not be accepted.
Without specifying who put forward the text to the meeting chaired by Dutch Finance Minister Jeroen Dijsselbloem, the official said: “Some people’s insistence on the Greek government implementing the bailout is unreasonable and cannot be accepted.”
Most observers have speculated that the new Greek government would give in to the demands of the rest of the eurozone when push came to shove.
But these new Greek politicians are a different breed. They are not establishment lackeys. Rather, they are very principled radicals, and they are not about to be pushed around. I certainly do not agree with their politics, but I admire the fact that they are willing to stand up for what they believe. That is a very rare thing these days.
On Monday, Greek finance minister Yanis Varoufakis shared the following in the New York Times…
I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed.
Does that sound like a man that is going to back down to you?
Meanwhile, the other side continues to dig in as well.
Just consider the words of the German finance minister…
Wolfgang Schaeuble, the German finance minister, accused the Greek government of “behaving irresponsibly” by threatening to tear up agreements made with the eurozone in return for access to the loans which are all that stand between Greece and financial collapse.
“It seems like we have no results so far. I’m quite skeptical. The Greek government has not moved, apparently,” he said.
“As long as the Greek government doesn’t want a program, I don’t have to think about options.”
Global financial markets are still acting as if they fully expect a deal to get done eventually.
I am not so sure.
And without a doubt, time is running short. As I mentioned above, something has got to be finalized by March 1st. The following comes from the Wall Street Journal…
Any changes to the content or expiration date of Greece’s existing €240 billion ($273 billion) bailout have to be decided by Friday, to give national parliaments in Germany, Finland and the Netherlands enough time to approve them before the end of the month. Without such a deal, Greece will be on its own on March 1, cut loose from the rescue loans from the eurozone and the International Monetary Fund that have sustained it for almost five years.
So what happens if there is no deal and Greece is forced to leave the eurozone?
Below, I have shared an excerpt from an article that details what Capital Economics believes would happen in the event of a “Grexit”…
- The drachma would be back. The euro would be effectively abandoned, and Greece would return to the drachma, its previous currency (it might take a new name). The drachma would likely tumble in value against the euro as soon as it was issued, and how much the government could print quickly would be a big issue.
- It would have to be fast, with capital controls. There would be people trying to pull their money out of Greece’s banks en masse. The Greek government would have to make that illegal pretty quickly. The European Central Bank drew up Grexit plans in 2012, and might be dusting them off now.
- European life support for Greek banks would be withdrawn. Greek banks can currently access emergency liquidity assistance from the ECB, which would be removed if Greece left the euro.
- Likely unrest and disorder. Barclays expects that this sudden economic collapse would “aggravate social unrest”, and notes that historically similar moves have caused a 45-85% devaluation of the currency. Capital Economics suggests that the drop could be more mild, closer to 20%, and Oxford Economics says 30%.
- Greece would resume economic policymaking. Greece’s central bank would probably start doing its own QE programme, and the government would likely return to running deficits, no longer restrained by bailout rules (though investors would probably want large returns, given the risk of another default).
- Inflation would spike immediately, but both Capital Economics and Oxford Economics say that should be temporary. It might look a bit like Russia this year — with the new currency in freefall until it finds its level against the euro, prices inside Greece would rise at dramatic speed. The inflation might be temporary, however, because with unemployment above 20%, Greece has plenty of spare labour slack to produce more.
That certainly does not sound good.
And once Greece leaves, everyone would be wondering who is next, because there are quite a few other deeply financially troubled nations in the eurozone.
David Stockman believes that Spain is a prime candidate…
In spite of the “recovery” in Spain, close to 24% are still unemployed. That statistic explains Pessimism in the Streets.
The crisis is here to stay according to significant majority of Spaniards. The general perception is that the current situation in which the country is negative and far from getting better, can only stay stagnant or even worse.
A Metroscopia poll published in El País makes it clear that the Spanish are unhappy with the current state of the country. Five out of six (83%) see the economic situation as “bad”, while more than half of the remaining perceive “regular”.
Right now, Europe is already teetering on the brink of an economic depression.
If this Greek debt crisis is not resolved, it could set in motion a chain of events which could start collapsing financial institutions all over Europe.
Yes, we have been here before and a deal has always emerged in the end.
But this time is different. This time very idealistic radicals are running things in Greece, and the “old guard” in Europe has no intention of giving in to them.
So let’s watch and see how this game of “chicken” plays out.
I have a feeling that it is not going to end well.
Who is to blame for the staggering collapse of the price of oil? Is it the Saudis? Is it the United States? Are Saudi Arabia and the U.S. government working together to hurt Russia? And if this oil war continues, how far will the price of oil end up falling in 2015? As you will see below, some analysts believe that it could ultimately go below 20 dollars a barrel. If we see anything even close to that, the U.S. economy could lose millions of good paying jobs, billions of dollars of energy bonds could default and we could see trillions of dollars of derivatives related to the energy industry implode. The global financial system is already extremely vulnerable, and purposely causing the price of oil to crash is one of the most deflationary things that you could possibly do. Whoever is behind this oil war is playing with fire, and by the end of this coming year the entire planet could be dealing with the consequences.
Ever since the price of oil started falling, people have been pointing fingers at the Saudis. And without a doubt, the Saudis have manipulated the price of oil before in order to achieve geopolitical goals. The following is an excerpt from a recent article by Andrew Topf…
We don’t have to look too far back in history to see Saudi Arabia, the world’s largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices.
It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.
The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel.
Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount. OPEC’s refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.
If the Saudis wanted to stabilize the price of oil, they could do that immediately by announcing a production cutback.
The fact that they have chosen not to do this says volumes.
In addition to wanting to harm U.S. shale producers, some believe that the Saudis are determined to crush Iran. This next excerpt comes from a recent Daily Mail article…
Above all, Saudi Arabia and its Gulf allies see Iran — a bitter religious and political opponent — as their main regional adversary.
They know that Iran, dominated by the Shia Muslim sect, supports a resentful underclass of more than a million under-privileged and angry Shia people living in the gulf peninsula — a potential uprising waiting to happen against the Saudi regime.
The Saudis, who are overwhelmingly Sunni Muslims, also loathe the way Iran supports President Assad’s regime in Syria — with which the Iranians have a religious affiliation. They also know that Iran, its economy plagued by corruption and crippled by Western sanctions, desperately needs the oil price to rise. And they have no intention of helping out.
The fact is that the Saudis remain in a strong position because oil is cheap to produce there, and the country has such vast reserves. It can withstand a year — or three — of low oil prices.
There are others out there that are fully convinced that the Saudis and the U.S. are actually colluding to drive down the price of oil, and that their real goal is to destroy Russia.
In fact, Venezuela’s President Nicolas Maduro openly promoted this theory during a recent speech on Venezuelan national television…
“Did you know there’s an oil war? And the war has an objective: to destroy Russia,” he said in a speech to state businessmen carried live on state TV.
“It’s a strategically planned war … also aimed at Venezuela, to try and destroy our revolution and cause an economic collapse,” he added, accusing the United States of trying to flood the market with shale oil.
Venezuela and Russia, which both have fractious ties with Washington, are widely considered the nations hardest hit by the global oil price fall.
And as I discussed just the other day, Russian President Vladimir Putin seems to agree with this theory…
“We all see the lowering of oil prices. There’s lots of talk about what’s causing it. Could it be an agreement between the U.S. and Saudi Arabia to punish Iran and affect the economies of Russia and Venezuela? It could.”
Without a doubt, Obama wants to “punish” Russia for what has been going on in Ukraine. Going after oil is one of the best ways to do that. And if the U.S. shale industry gets hurt in the process, that is a bonus for the radical environmentalists in Obama’s administration.
There are yet others that see this oil war as being even more complicated.
Marin Katusa believes that this is actually a three-way war between OPEC, Russia and the United States…
“It’s a three-way oil war between OPEC, Russia and North American shale,” says Marin Katusa, author of “The Colder War,” and chief energy investment strategist at Casey Research.
Katusa doesn’t see production slowing in 2015: “We know that OPEC will not be cutting back production. They’re going to increase it. Russia has increased production to all-time highs.” With Russia and OPEC refusing to give up market share how will the shale industry compete?
Katusa thinks the longevity and staying power of the shale industry will keep it viable and profitable. “The versatility and the survivability of a lot of these shale producers will surprise people. I don’t see that the shale sector is going to collapse over night,” he says. Shale sweet spots like North Dakota’s Bakken region and Texas’ Eagle Ford area will help keep production levels up and output steady.
Whatever the true motivation for this oil war is, it does not appear that it is going to end any time soon.
And so that means that the price of oil is going to go lower.
How much lower?
One analyst recently told CNN that we could see the price of oil dip into the $30s next year…
Few saw the energy meltdown coming. Now that it’s here, industry analysts warn another move lower is possible as the momentum remains firmly to the downside.
“If this doesn’t hold, we could go back to price levels in late 2008 and early 2009 — down in the $30s. There’s no reason why it couldn’t happen,” said Darin Newsom, senior analyst at Telvent DTN.
Others are even more pessimistic. For instance, Jeremy Warner of the Sydney Morning Herald, who correctly predicted that the price of oil would fall below $80 this year, is now forecasting that the price of oil could fall all the way down to $20 next year…
Revisiting the past year’s predictions is, for most columnists a frequently humbling experience. The howlers tend to far outweigh the successes. Yet, for a change, I can genuinely claim to have got my main call for markets – that oil would sink to $US80 a barrel or less – spot on, and for the right reasons, too.
Just in case you think I’m making it up, this is what I said 12 months ago: “My big prediction is for $US80 oil, from which much of the rest of my outlook for the coming year flows. It’s hard to overstate the significance of a much lower oil price – Brent at, say, $US80 a barrel, or perhaps lower still – yet this is a surprisingly likely prospect, the implications of which have been largely missed by mainstream economic forecasters.”
If on to a good thing, you might as well stick with it; so for the coming year, I’m doubling up on this forecast. Far from bouncing back to the post crisis “normal” of something over $US100 a barrel, as many oil traders seem to expect, my view is that the oil price will remain low for a long time, sinking to perhaps as little as $US20 a barrel over the coming year before recovering a little.
But even Warner’s chilling prediction is not the most bearish.
A technical analyst named Abigail Doolittle recently told CNBC that under a worst case scenario the price of oil could fall as low as $14 a barrel…
No one really saw 2014’s dramatic plunge in oil price coming, so it’s probably fair to say that any predictions about where it’s going from here fall somewhere between educated guesses and picking a number out of a hat.
In that light, it’s less than shocking to see one analyst making a case—albeit in a pure outlier sense—for a drop all the way below $14 a barrel.
Abigail Doolittle, who does business under the name Peak Theories Research, posits that current chart trends point to the possibility that crude has three downside target areas where it could find support—$44, $35 and the nightmare scenario of, yes, $13.65.
But the truth is that none of those scenarios need to happen in order for this oil war to absolutely devastate the U.S. economy and the U.S. financial system.
There is a very strong correlation between the price of oil and the performance of energy stocks and energy bonds. But over the past couple of weeks this correlation has been broken. The following chart comes from Zero Hedge…
It is inevitable that at some point we will see energy stocks and energy bonds come back into line with the price of crude oil.
And it isn’t just energy stocks and bonds that we need to be concerned about. There is only one other time in all of history when the price of oil has crashed by more than 50 dollars in less than a year. That was in 2008 – just before the great financial crisis that erupted in the fall of that year. For much, much more on this, please see my previous article entitled “Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”
Whether the price of oil crashed or not, we were already on the verge of massive financial troubles.
But the fact that the price of oil has collapsed makes all of our potential problems much, much worse.
As we enter 2015, keep an eye on energy stocks, energy bonds and listen for any mention of problems with derivatives. The next great financial crisis is right around the corner, but most people will never see it coming until they are blindsided by it.
Barack Obama is warning that if he does not get everything that he wants that he will force the U.S. government into a devastating debt default which will cripple the entire global economy. In essence, Obama has become so power mad that he is actually willing to take the entire planet hostage in order to achieve his goals. A lot of people are blaming the government shutdown on the Republicans, but they have already voted to fund the entire government except for Obamacare. The U.S. Constitution requires that all spending bills originate in the House of Representatives, and the House did their duty by passing a spending bill. If the Senate or the President do not like the bill that the House has passed, then negotiations need to take place. That is how our system works. And the weak-kneed Republicans have already indicated that they are willing to give up virtually all of their prior demands. In fact, if Obama offered all of them 20 dollar gift certificates to Denny’s to end this crisis they would probably jump at that deal. But that is not good enough for Obama. He has made it clear that he will settle for nothing less than the complete and unconditional surrender of the Republican Party.
Why is Obama doing this? Why is Obama willing to bring the country to the brink of financial disaster?
It isn’t hard to figure out. Just check out what one senior Obama administration official said last week…
“We are winning…. It doesn’t really matter to us” how long the shutdown lasts “because what matters is the end result,” a senior Obama Administration official told the Wall Street Journal last week.
This is all about a political victory and crushing the Republicans. Obama doesn’t really care how long this crisis lasts because he believes that he is getting the end result that he wants.
According to Obama, the Republican Party is just supposed to roll over and give him the exact spending bill that he wants and also give him another trillion dollar increase in the debt limit.
If the Republicans do not give him that, he is willing to plunge us into financial oblivion.
The funny thing is that most Americans do not want the debt limit increased. According to one new poll, 58 percent of all Americans do not even want the debt ceiling to be increased by a single penny.
And recent polls show that Americans are against Obamacare by an average margin of about 10 percent.
But the pathetic Republican Party is actually willing to hand Obama a trillion dollar debt ceiling increase and fully fund Obamacare if Obama will at least give them something.
Unfortunately, Obama won’t even give them the time of day.
So don’t blame the Republicans for what is happening. The Republicans have already compromised themselves to the point of utter disgrace. If Obama had been willing to even compromise a couple of inches this entire crisis would already be over.
And nobody should be claiming that the Republicans won’t vote to end this shutdown. They have already voted to end it. The following is from a recent article by Thomas Sowell…
There is really nothing complicated about the facts. The Republican-controlled House of Representatives voted all the money required to keep all government activities going — except for ObamaCare.
This is not a matter of opinion. You can check the Congressional Record.
As for the House of Representatives’ right to grant or withhold money, that is not a matter of opinion either. You can check the Constitution of the United States. All spending bills must originate in the House of Representatives, which means that Congressmen there have a right to decide whether or not they want to spend money on a particular government activity.
Whether ObamaCare is good, bad or indifferent is a matter of opinion. But it is a matter of fact that members of the House of Representatives have a right to make spending decisions based on their opinion.
Once again, the Republicans have already indicated that they are willing to fund Obamacare. They just want Obama to throw them a bone.
And Obama will not do it.
So either the Republicans are going to cave in completely (a very real possibility) or we are going to pass the “debt ceiling deadline”.
What happens then?
Well, we would have more of a “real government shutdown” than the fake shutdown that we are having right now.
Once the federal government cannot borrow any more money, it will only be able to spend what it actually has on hand. That means that a lot more government functions will have to shut down.
Money will still be coming in to the government, but it won’t be enough to fund everything. According to the Wall Street Journal, the federal government will still have enough money to pay interest on the debt, make Social Security payments, make Medicare payments, make Medicaid payments, provide food stamp benefits and pay the military if they cut almost everything else out.
The other day, I suggested that the federal government could potentially start defaulting on interest payments on the debt as early as November. But that would only happen if the federal government manages their money foolishly.
If the federal government managed their money smartly and saved cash for the interest payments as they came due, they would not have to miss any.
But when was the last time the federal government ever did anything “smartly”?
For the sake of argument, however, let’s assume that the federal government can manage money wisely and can save up enough cash ahead of time for large interest payments as they come due.
If that could somehow be managed, then according to Paul Mampilly the government would never need to actually default…
The U.S. Treasury always has money coming into its accounts. So its always got some amount of cash that it can use to pay interest on bonds. That’s especially true right now because the government is partially shutdown and there’s no cash going out from its accounts.
In fact, when you look at it the U.S. Treasury should simply have no trouble making interest payments on bonds that it has issued.
And there’s no restriction on the U.S. Treasury prioritizing interest payments. Why?
The obligation to pay interest is set by the 1917 Second Liberty Bond Act and laws that commanded the Treasury to pay interest on the debt. You can look this up in section 3123 of Title 31 of the U.S. Code and section 4 of the 14th Amendment of the Constitution and in Supreme Court precedent (Perry v. United States). It’s all there in black and white.
So the only possible way the U.S. defaults on its debt is if Barack Obama, President of the United States, instructs his Treasury secretary Jack Lew to default on the debt.
And according to the Washington Post, Moody’s has just issued a memo that also indicates that the federal government should be able to make all interest payments even if the debt limit is not increased…
In a memo being circulated on Capitol Hill Wednesday, Moody’s Investors Service offers “answers to frequently asked questions” about the government shutdown, now in its second week, and the federal debt limit. President Obama has said that, unless Congress acts to raise the $16.7 trillion limit by next Thursday, the nation will be at risk of default.
Not so, Moody’s says in the memo dated Oct. 7.
“We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact,” the memo says. “The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.”
Of course the federal government would have to stop throwing money around like a drunk gambler at a casino in Las Vegas in order for this to work.
On the very first day of the government shutdown, the feds gave $445 million to the Corporation for Public Broadcasting. Apparently Elmo is considered to be “essential personnel” by the Obama administration.
And according to CNS News, the U.S. Army has committed more than $47,000 to buy a mechanical bull during this “shutdown”…
The government shutdown may be keeping furloughed federal workers at home, but on Monday the U.S. Army contracted to buy a mechanical bull.
The $47,174 contract was awarded on Oct. 7 to Mechanical Bull Sales Inc. of State College, Penn.
So needless to say, there is some serious doubt about whether the federal government would be able to manage their money effectively in the event that the debt ceiling deadline passes.
And if the U.S. did start defaulting on debt payments, it would be absolutely disastrous for the global economy as I discussed in a previous article…
“A U.S. debt default would cause stocks to crash, would cause bonds to crash, would cause interest rates to soar wildly out of control, would cause a massive credit crunch, and would cause a derivatives panic that would be absolutely unprecedented. And that would just be for starters.”
Other nations that we depend upon to lend us money would stop lending to us and would start dumping U.S. debt instead.
Could you imagine what would happen if China started dumping a large portion of the 1.3 trillion dollars in U.S. debt that they are holding?
It would be a total nightmare. The collapse of Lehman Brothers would pale in comparison.
And already some banks are stuffing their ATM machines with extra cash just in case the general public starts to panic.
But none of this has to happen.
If Obama decides to negotiate with the Republicans, this crisis will likely end very rapidly.
If not, and we pass the “debt ceiling deadline”, the federal government will still have enough money to make interest payments on the debt as long as they manage their money correctly.
Unfortunately, Obama seems far more interested in playing political games than he is in solving our problems.
In fact, Park Service rangers have been ordered to “make life as difficult for people as we can” during this government shutdown. Obama has apparently decided to punish the American people in order to get leverage on the Republicans. Just check out the following example from a new Weekly Standard article…
There’s a cute little historic site just outside of the capital in McLean, Virginia, called the Claude Moore Colonial Farm. They do historical reenactments, and once upon a time the National Park Service helped run the place. But in 1980, the NPS cut the farm out of its budget. A group of private citizens set up an endowment to take care of the farm’s expenses. Ever since, the site has operated independently through a combination of private donations and volunteer workers.
The Park Service told Claude Moore Colonial Farm to shut down.
The farm’s administrators appealed this directive—they explained that the Park Service doesn’t actually do anything for the historic site. The folks at the NPS were unmoved. And so, last week, the National Park Service found the scratch to send officers to the park to forcibly remove both volunteer workers and visitors.
Think about that for a minute. The Park Service, which is supposed to serve the public by administering parks, is now in the business of forcing parks they don’t administer to close. As Homer Simpson famously asked, did we lose a war?
The hypocrisy that Obama has demonstrated during this “government shutdown” has been astounding.
He has barricaded open air war memorials to keep military veterans from visiting them, but he temporarily reopened the National Mall so that a huge pro-immigration rally that would benefit him politically could be held.
He has continued to fund al-Qaeda rebels in Syria that are trying to overthrow the Syrian government, but he has been withholding death benefits from families of fallen U.S. soldiers.
The conduct of the Obama administration during this shutdown has been so egregious that is hard to put into words. Obama has chosen to purposely harm the American people in order to score political points.
But this is how our politicians view us these days. As Monty Pelerin recently explained, most of our politicians have absolutely no problem with exploiting us for their own purposes…
The concept of political service has been replaced by that of masked exploitation. The public is no longer viewed as clients or constituents to be served. Instead they have become political prey. Politicians see the public as a collection of wallets and votes, fair game to be hunted as the means to expand power and wealth. Constituents are now the Soylent Green of the political food chain.
The political class assumes the public exists to serve them, not the other way around. Public participation beyond the lightening of wallets or the provision of votes is unwelcome. It is considered “interference” that must be deterred by the ruling class.
The political class is now a huge, voracious parasite. Like the plant in the Little Shop of Horrors, its needs have grown to the point where it threatens anything productive. Its needs now exceed the willingness for continued sacrifice on the part of the productive. The parasite threatens the very existence of the host.
The political Ponzi scheme of tax, borrow and spend has reached its limit. Either it will die when citizens turn on it or it will kill the productive, ensuring its own destruction.
It perishes in the end. Whether it takes civilization with it is the bigger question.
Is there anyone out there that still does not believe that our system is broken?
Hopefully cooler heads will prevail and power mad Obama will decide to toss the Republicans a few crumbs and this crisis will be resolved.
Because if this crisis is not resolved soon, it could have consequences that are far beyond what any of us could possibly imagine.
A U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash unlike anything that the world has ever seen before. If the U.S. government purposely wanted to damage the global financial system, the best way that they could do that would be to default on U.S. debt obligations. A U.S. debt default would cause stocks to crash, would cause bonds to crash, would cause interest rates to soar wildly out of control, would cause a massive credit crunch, and would cause a derivatives panic that would be absolutely unprecedented. And that would just be for starters. But don’t just take my word for it. These are the things that top financial experts all over the planet are saying will happen if there is an extended U.S. debt default.
Because they are so close together, the “government shutdown” and the “debt ceiling deadline” are being confused by many Americans.
As I wrote about the other day, the “partial government shutdown” that we are experiencing right now is pretty much a non-event. Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world. In fact, only about 17 percent of the federal government is actually shut down at the moment. This “shutdown” could continue for many more weeks and it would not affect the global economy too much.
On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous.
And if the U.S. government is eventually forced to start delaying interest payments on U.S. debt (which could potentially happen as soon as November), that would be absolutely catastrophic.
Once again, just don’t take my word for it. The following are 12 very ominous warnings about what a U.S. debt default would mean for the global economy…
#1 Gerald Epstein, a professor of economics at the University of Massachusetts Amherst: “If the US does default, that will make the Lehman Brothers bankruptcy look like a cakewalk”
#2 Tim Bitsberger, a former Treasury official under President George W. Bush: “If we miss an interest payment, that would blow Lehman out of the water”
#3 Peter Tchir, founder of New York-based TF Market Advisors: “Once the system starts to break down related to settlement and payments, then liquidity disappears, as we saw after Lehman”
#4 Bill Isaac, chairman of Cincinnati-based Fifth Third Bancorp: “We can’t even imagine all the things that might happen, just like Henry Paulson couldn’t imagine all the bad things that might happen if he let Lehman go down”
#5 Jim Grant, founder of Grant’s Interest Rate Observer: “Financial markets are all confidence-based. If that confidence is shaken, you have disaster.”
#6 Richard Bove, VP of research at Rafferty Capital Markets: “If they seriously default on the debt, what we’re really talking about is a depression”
#7 Chinese vice finance minister Zhu Guangyao: “The U.S. is clearly aware of China’s concerns about the financial stalemate [in Washington] and China’s request for the US to ensure the safety of Chinese investments.”
#8 The U.S. Treasury Department: “A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse”
#9 Goldman Sachs: “We estimate that the fiscal pull-back would amount to 9pc of GDP. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed quickly”
#10 Simon Johnson, former chief economist for the IMF: “It would be insane to default, but it’s no longer a zero-percent probability”
#11 Warren Buffett about the potential of a debt default: “It should be like nuclear bombs, basically too horrible to use”
#12 Bloomberg: “Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.”
A U.S. debt default could be the trigger for the “nightmare scenario” that so many people have been writing about in recent years. In fact, it could greatly accelerate the timetable for the inevitable economic collapse that is coming. A recent Yahoo article described some of the things that we would likely see in the event of an extended U.S. debt default…
A default would upend money markets, destroy bond funds, slam the brakes on lending, cause interest rates to spiral, make our banks insolvent, and deal a blow to our foreign trading partners and creditors around the globe; all of which would throw the U.S. and the world into economic disarray.
And of course stocks would crash big time. Deutsche Bank’s David Bianco believes that if the U.S. government starts missing interest payments on U.S. Treasury bonds, we could see the S&P 500 go down to 850 by the end of the year.
There would be almost immediate panic among ordinary Americans as well. In fact, it is being reported that some banks are already stuffing their ATM machines will extra cash just in case…
With just 10 days left to raise the debt ceiling and congressional Republicans threatening to force the government to default on its obligations, banks are taking some dramatic steps to prepare for the economic chaos that would result should the brinkmanship continue.
The Financial Times reports that one major U.S. bank has started stuffing its automatic teller machines with extra cash in preparation for a possible bank run from panicked depositors. The New York Times reports that another bank is weighing a plan to advance funds to customers who rely on Social Security and other government payments that could stop in the event of a default.
Let’s hope that cooler heads will prevail and that a U.S. debt default will be avoided.
Unfortunately, it appears that the Democrats are absolutely determined not to be moved from their current position a single inch. They have decided to refuse to negotiate and demand that the Republicans give them every single thing that they want.
And who can really blame them for adopting that strategy? After all, it has certainly worked in the past. Whenever Democrats have stood united and have refused to give a single inch, the Republicans have always freaked out and caved in eventually.
Will this time be any different?
The funny thing is that once upon a time, Barack Obama was adamantly against any increase in the debt limit. The following comes courtesy of Zero Hedge…
But now Obama says that it is so unreasonable to be opposed to a debt limit increase that any negotiations are out of the question.
So which Obama is right?
If the Democrats will not negotiate, a debt default could still be avoided if the Republicans give in.
And that is what they always do, right?
Perhaps not this time. Just check out what John Boehner had to say on Sunday…
“I, working with my members, decided to do this in a unified way,” the speaker said — with demands to defund, delay or otherwise alter the Affordable Care Act.
Boehner had expected that the Obamacare fight would come during the next vote to raise the debt ceiling, “but, you know, working with my members, they decided, let’s do it now,” he said. “And the fact is, this fight was going to come, one way or another. We’re in the fight. We don’t want to shut the government down. We’ve passed bills to pay the troops. We passed bills to make sure the federal employees know that they’re going to be paid throughout this.”
“You’ve never seen a more dedicated group of people who are thoroughly concerned about the future of our country,” he said of House Republicans. “It is time for us to stand and fight.”
But will the Republicans really stand and fight?
In the past, betting on the intestinal fortitude of the Republican Party has been a loser every single time.
So we’ll see. Boehner insists that this time is different. Boehner insists that he is not going to fold like a 20 dollar suit this time. In fact, when he was asked if the U.S. government was headed toward a debt default if Obama continued to refuse to negotiate, Boehner made the following statement…
“That’s the path we’re on.”
The mainstream media has certainly been placing most of the blame at the feet of the Republicans, but at least the U.S. House of Representatives has been trying to get an agreement reached. The House has voted 26 times since the Senate last voted. Harry Reid has essentially shut the Senate down until the Republicans fold and give the Democrats exactly what they want.
The funny thing is that this could probably be solved very easily. If the Democrats agreed to a one year delay to the individual mandate, the Republicans would probably jump at it. And because of epic technical failures, hardly anyone has been able to get signed up for Obamacare anyway. So a one year delay would give the Obama administration time to get their act together.
Unfortunately, the Democrats seem absolutely obsessed with the idea that they will not give the Republicans one single inch. They seem to believe that this will be to their political benefit.
But this is a very dangerous game that they are playing. The U.S. government must roll over 441 billion dollars of short-term debt between October 18th and November 15th.
If a debt ceiling increase is not in place by that time, it will send interest rates soaring. Borrowing costs for state and local governments, corporations, and ordinary Americans will go through the roof and economic activity will be hit really hard.
And as detailed above, we could potentially be looking at a financial crash that would make 2008 look like a Sunday picnic.
So let us hope for a political solution soon. That will at least kick the can down the road for a little bit longer.
If a debt default were to happen before the end of this year, that would bring a tremendous amount of future economic pain into the here and now, and the consequences would likely be far greater than any of us could possibly imagine.