The Beginning Of The End
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The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?

Bubble - Photo by Jeff KubinaDid you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st?  We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“.  In other words, it could be a “Lehman Brothers moment” for Asia.  And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well.  Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion.  That is an increase of $14 trillion in just a little bit more than 5 years.  Much of that “hot money” has flowed into stocks, bonds and real estate in the United States.  So what do you think is going to happen when that bubble collapses?

The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen.  Never before has so much private debt been accumulated in such a short period of time.  All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads.  In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014.

Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money.  But the truth is that what has been happening in China surpasses all of their efforts combined.  You can see an incredible chart which graphically illustrates this point right here.  As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

As with all other things in the financial world, what goes up must eventually come down.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system.  The following is from a Reuters article

The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.

Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.

If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly.  A recent Forbes article explained why this is the case…

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China.  According to Forbes, M2 in China increased by 13.6 percent last year…

And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.

Overall, M2 in China is up by about 1000 percent since 1999.  That is absolutely insane.

And of course China is not the only place in the world where financial trouble signs are erupting.  Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.

If current trends continue, many other big banks will soon be experiencing a “bond headache” as well.  At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years.  Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.

But I am not the only one talking about it.

In fact, the World Economic Forum is warning about the exact same thing…

Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.

Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.

This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?

In the end, it doesn’t really matter.  The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.

It is just a matter of time.

10.7 Percent: Unemployment In Europe Is Worse Than It Was At The Peak Of The Last Recession

The unemployment rate in the eurozone is now 10.7 percent.  That is the highest the unemployment rate has been since the introduction of the euro.  The unemployment rate in the eurozone never got any higher than 10.2 percent during the last recession.  This is very troubling news.  It was just recently announced that the eurozone has entered another recession, and already the unemployment rate is hitting new record highs.  So how bad are things going to get in the months to come?  The truth is that the problems for Europe are just starting.  The European sovereign debt crisis continues to get worse, and another major global financial crisis is going to be here way too soon.  The EU as a whole has a larger population, a larger banking system and more Fortune 500 companies than the United States does.  When the financial system of Europe crashes, the entire world is going to feel it.

Some of the unemployment numbers coming out of Europe are absolutely staggering.

Unemployment in Spain is 19.9 percent.

Unemployment in Greece is 23.3 percent.

And when you look at youth unemployment the numbers are far worse.

The unemployment rate for workers under the age of 25 is 48.1 percent in Greece and 49.9 percent in Spain.

If you look carefully at the photos of the austerity riots happening in Spain and in Greece you will notice that the vast majority of the protesters are young people.

Instead of getting better, the unemployment numbers in Europe just keep getting worse.  Many analysts were shocked by these new numbers.  The following is from a CNN article….

“This is appalling,” said Carl Weinberg, chief economist at High Frequency Economics, highlighting that the unemployment rate following the collapse of Lehman Brothers peaked at 10.2%.

Appalling indeed.

The frightening thing is that we haven’t even had a major financial crisis in Europe yet.  So far, the powers that be have been able to keep Greece from defaulting and have been able to keep major banks all over Europe from collapsing.

But there are quite a few signs that the “moment of reckoning” for Europe is rapidly approaching….

-The European Central Bank announced on Tuesday that it would no longer take Greek bonds as collateral from European banks. That is a really bad sign.

-Major European banks are revealing unexpectedly huge losses on Greek debt.  The following is from a Reuters article….

The scars of Greece’s debt crisis were laid bare in heavy losses from a string of European banks on Thursday, and bosses warned the region’s precarious finances would continue to threaten economic growth and earnings.

From France to Germany, Britain to Belgium, four of the region’s biggest banks lined up to reveal they lost more than 8 billion euros (6.8 million pounds) last year from their Greek bonds holdings.

“We are in the worst economic crisis since 1929,” Credit Agricole chief executive Jean-Paul Chifflet said.

-The International Swaps and Derivatives Association has ruled that the Greek debt deal will not trigger payouts on credit default swaps.  This is going to make it less likely that private bondholders will voluntarily agree to the debt deal.

This ruling is also seriously shaking confidence in credit default swaps.  After all, they are supposed to be “insurance” in case something happens.  But if they aren’t going to pay out when you need them, what good are they?

-Voters in Germany are sick and tired of pouring money into a black hole.  One recent opinion poll in Germany showed that Germans are overwhelmingly against more bailouts for Greece.

Some German politicians are becoming very open about their feelings for Greece.  For example, Interior Minister Hans-Peter Friedrich said the following in a recent interview with Der Spiegel….

“Greece’s chances to regenerate itself and become competitive are surely greater outside the monetary union than if it remains in the euro area.” He added that he did not support a forced exit. “I’m not talking about throwing Greece out, but rather about creating incentives for an exit that they can’t pass up.”

-In Greece, news publications are openly portraying German Chancellor Angela Merkel as Hitler.  Far left political parties that oppose the bailouts are surging in the polls and anger and frustration are reaching unprecedented levels.

The following is from a recent article in The Guardian….

There is a growing animosity towards Germany on the streets of Athens. Angela Merkel bears most of the hostility with one of Greece’s newspapers last week mocking the chancellor up as a Nazi on its front page.

Niki Fidaki, 40, says Greeks are angry at Germany and the troika’s demands for higher taxes and public services cuts. “People can’t afford to pay the tax. My pay has gone down, but my taxes have gone up. But, I’m a lucky one – half of my friends don’t have jobs. Greeks hate that they are asking us to pay all the time when we don’t have the money. Families have no work, they have kids to look after but no money to pay for anything.”

As I have written about before, Greece is already going through a devastating economic depression.  The people of Greece are not in the mood to be pushed much further.

The eurozone is a powder keg that could explode at any time.

So why is the U.S. economy doing so much better than the European economy right now?

Well, a big reason is because we haven’t seen any austerity in the United States yet.

Barack Obama is funding our false prosperity by borrowing 150 million dollars an hour from our children and our grandchildren.

Of course all of this reckless borrowing is going to make the eventual collapse of our financial system far worse, but right now Americans don’t seem to care.  The only thing the mainstream media seems to care about is that some of our economic numbers are getting slightly better.

The sad thing is that our government is spending a lot of this money on some of the most stupid things that you could possibly imagine.

Did you know that the Obama administration just spent $750,000 on a brand new soccer field for detainees held at Guantanamo Bay?

I wish I had a $750,000 soccer field to play on.

I would love that.

Look, when the federal government quits stealing more than a trillion dollars a year from future generations things are going to look a whole lot different in this country.

So pay attention to what is going on in Europe.

That is where we are headed eventually.

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