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For over 30 years, sovereign nations, particularly in the West have been
buying votes by offering social payments in the form of welfare, Medicare,
social security, and the like.
The ridiculousness of this should not be lost on anyone. Politicians, in
order to be elected, promise to allocate taxpayer funds on social programs
that will benefit said taxpayers down the road (we’re simply talking about
social spending, not infrastructure or other costs.
The concept that taxpayers might simply just keep
the money to begin with never enters the equation. And because everyone
believes that they are somehow spending someone else’s
money, they play along.
When you believe that you are spending someone else’s money, it’s very
easy to write a blank check, which is precisely what Western nations have
been doing for years, promising everyone a safe and secure retirement without
ever bothering to see where the money would come from.
When actual bills came due to fund this stuff, Governments quickly
discovered that current tax revenues couldn’t cover it… so they issued
sovereign debt to make up the difference.
And so the bond bubble was created.
The large banks, that have a monopoly on managing sovereign debt auctions,
were only too happy to play along with this. The reasons are as follows:
1) They can use these alleged “risk-free” assets as collateral
to backstop tens of trillions worth of derivatives trades. A $1 million
investment in your typical US Treasury can backstop over $15 million worth of
derivatives if not more. The profits from the derivatives markets remains a
primary source of revenue for the banks.
2) Sovereign Governments are only too happy to bail out the
big banks if the stuff ever hits the fan on the trades that are backstopped
by the sovereign debt (see 2006 onwards). Since the banks are the ones
holding the sovereign debt, they can always threaten to dump bonds, which
would render the whole social welfare Ponzi bankrupt (see what happened in
Europe when sovereign bonds collapsed in 2011-2012).
3) In a debt-based financial system such as the current one,
sovereign bonds are the senior most assets in the system. Those who own these
in bulk are at the top of the financial food chain in terms of financial,
economic, and political clout.
Since it was rarely if ever a problem to issue sovereign debt, Governments
kept promising future payments that they didn’t have until we reach today:
the point at which most Western nations are sporting Debt to GDP ratios well
north of 300% when you consider unfunded liabilities (the social spending
programs mentioned earlier).
Now, cutting social spending is usually considered political suicide
(after all, the voters put you in office in the first place based on you
promising to pay them welfare payments down the road). So rather than default
on the social contract made with voters, the political class will simply push
to issue MORE debt to finance old debt that is coming
due.
The US did precisely this in the fourth quarter of 2014, issuing over $1
trillion in new debt simply to pay back old debt that was coming due.
This is how the bond market becomes a bubble. Between 2000 and today, the
global bond market has nearly TRIPLED in size. Today, it’s north of $100
trillion in size. And it’s backstopping over $555 trillion in derivatives
trades.
There is literally no easy fix to any of this. The pain will be severe.
And so everyone in charge of the important decisions (the political elite,
the big banks, and the Central Banks) will push this as far as it can
possibly go before taking the inevitable hit.
The fact that Central banks are now openly cutting interest rates to
NEGATIVE should tell you how far along we are in terms of funding problems
(at these rates, bond holders are PAYING the Government for the right to own
bonds). From a baseball analogy we’re in the late 8th, possibly
early 9th inning. When the game ends, the entire mess will
collapse. And it will make 2008 look like a joke.
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