The Coming Epic Collapse of the Bond Bubble

Phoenix Capital Research's picture

In the 1960s every new $1 in debt bought nearly $1 in GDP growth. In the 70s it began to fall as the debt climbed. By the time we hit the ‘80s and ‘90s, each new $1 in debt bought only $0.30-$0.50 in GDP growth. And today, each new $1 in debt buys only $0.10 in GDP growth at best.


Put another way, the growth of the last three decades, but especially of the last 5-10 years, has been driven by a greater and greater amount of debt. This is why the Fed has been so concerned about interest rates.


You can see this in the chart below. It shows the total credit market outstanding divided by GDP. As you can see starting in the early ‘80s, the amount of debt (credit) in the system has soared. We’ve only experienced one brief period of deleveraging, which came during the 2007-2009 era.



Bernanke's Fed couldn’t stomach this kind of deleveraging. The reason is simple: those who have accumulated great wealth as a result of this system are highly incentivized to keep it going.


The Fed doesn’t talk to you or me about these things. It calls Goldman Sachs or JP Morgan. And most of the Wall Street wealth of the last 30 years has been the result of leverage (credit growth). Take away credit and easy monetary policy and a lot of very “wealthy” people suddenly are not so wealthy.


Let me put this in terms of real job growth (created by startups) vs the “job growth” of the last five years.


According to the National Bureau of Economic Research, startups account for nearly all of the US’s net job creation (total job gains minus total job losses). And smaller startups have a very different perspective of debt than larger more established firms.


The reason is quite simple. When a small business owner takes out a loan he or she is usually posting personal assets as collateral (a home, car or some other item). As a result, the debt burden comes with the very real possibility of losing something of great value. And so debt is less likely to be incurred.


This stands in sharp contrast to a larger firm, which can post collateral owned by the business itself (not the owners’ personal assets) and so feels less threatened by leveraging up. Thus, in this manner, QE and other loose monetary policies maintained by the Fed favor those larger firms rather than the real drivers of job creation: smaller firms and startups.


For this reason, the Fed’s policies, no matter what rhetoric the Fed uses, are more in favor of the stock market than the real economy. That is to say, they are more in favor of those firms that can easily access the Fed’s near zero interest rate lending windows than those firms that are most likely to generate jobs: smaller firms and start-ups.


This is why job growth remains anemic while the stock market has rallied to new all-time highs. This is why large investors like Bill Gross have applauded the Fed’s policies at first (when the deleveraging was about to wipe him out in 2008), but then turned against them in the last few years as a political move. This is why QE is so dangerous, because it increases concentration of wealth and eviscerates the middle class.


Guys like Warren Buffett or Larry Ellison of Oracle can take advantage of low interest rates to leverage up, acquiring more assets (that can produce income) by posting their current assets as collateral (Ellison commonly “lends” shares in Oracle to banks in exchange for bank loans).


Cheap debt is useful to them because the marginal risk of taking it on is small relative to that of a normal individual investor who would have to post a needed asset (his or her home) as collateral on a loan to leverage up.


This system works as long as debt continues to stay cheap. However, in the last 12 months the Fed has definitively crossed the point of no return with its policies. It is not just a matter of timing before this debt bubble bursts.


For a FREE Special Report outlining how to protect your portfolio from this, swing by:


Best Regards

Phoenix Capital Research 



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charles wright's picture

The growth of the last three decades, but especially of the last 5-10 years, has been driven by a greater and greater amount of debt. This is why the Fed has been so concerned about…

doctor10's picture

in the end, the crossing of that line, is what "homeland security" is all about to the NY/DC crowd

AGuy's picture

FWIW: The Fed has appeares to have drawn a line in the sand on the 10 year. Notice that the 10 year never really breaches 3.0%. sometimes there is a spike slightly above, but it usually falls below 3% in a matter of minutes. I think the Fed has capped the 10 year at 3%. Anyone care to comment?



the grateful unemployed's picture

3% is where most experts expect the Fed to draw the line, someone (wisely) said they thought that rates might overshoot, and go as high as 5, and in a free market that might happen, but not here and not now. if rates go above 3, then something is really wrong. its a lot like the gold market right now, gold prices fall and buyers overwhelm the supply. if rates go to 5 bond buyers will snap it up. its also a bit like my supermarket, where they lowered the price of this expensive sports drink 2.49 to .99, and since then each week they raise the price incrementally in order to see where the optimal price might be. its marketing, though i suspect the fed has no concern for the retail bond buyer. keep an eye on the TIP auctions.

dcj98gst's picture

I think the FED is quietly buying more than 40B in treasurys even though they say that is the monthly maximum.  Who would know?  There is no audit.  They are trying to offset the foreign selling right now.  Fingers in the dam but the FED only has so many fingers.  They will lose control when because we are rolling over sooo much debt in the next 6 months.

starman's picture

Um ......end of capitalism ?

the grateful unemployed's picture

the issue of how the rich access collateral and how joe bbq and his sb find capital is the key to understanding the decline of america. but is there a bond bubble in treasuries? a bond is only a contract to pay interest to the buyer, who in turn supplies collateral to the usg for a monthly stipend. if in point of fact the collateral was never there, or it was made on margin, mark to myth or what have you, then no payment is required to square the circle at maturity and the profits will more than offest the cost of servicing the debt.

its similar to the housing refi bubble, people took collateral out of their homes. and that was real money joe bbq and his wife saved by mailing in payments to the mortgage company every month. then joe bbq's neighbor who has no collateral got an interest only loan, and lived off the capital gains. (you see we all get to play the game too?)

suddenly the supply of buyers drops off the market tumbles briefly and the fed resets the asset values so joe and his neighbor are back to accessing collateral (which doesn't really belong to them it belongs to the mortgage company) it all works on paper and its very much like the stock market gains made on phony collateral (QE) is anyone going to make the banks PAY THAT MONEY BACK?? hell no, but trust me ducklings, if you go to jail for transporting narcotics, (you didn't know your sisters boyfriend was holding) and you do a couple years, your wife goes on welfare, when you get out welfare hands you the bill.

the issue of debt forgiveness is a very uneven slope, and (they believe) that monetized collateral, T bonds can be orphaned out, or retired when the need arises, just like MM funds, and there is no monetary balloon payment. there may be a credit shortage some time, but you'll never see those 1970s interest rates again until a lot of phony collateral is called in, and that will take a lot of time and the will to do just isnt' there, unless of course joe bbq gets in too deep on his cc.

ebworthen's picture

No Risk.

No risk for the Banks and no risk for the FED which serves them.

All the risk and cost is borne by the 99%.

Mike Cowan's picture

Yelllen is a delusional Democrat who will continue to harm millions.

the grateful unemployed's picture

yes but she projects the image of a compassionate soul, women, democrat, matronly. if bernanke was santa claus, yellen is mrs claus. (sumers on the other hand is a fat white (arrogant) male) just in case you wonder how obama decided who was more qualified

rainingFrogs's picture

"Right, any day now" ... so true.

With the yield on the 10yr UST now pushing the 3% envelope consistently over the last week, I am sitting here waiting patiently for Armageddon.

Anyone care to offer what the 3% threshold is likely to bring? Do the $trillions in interest rate derivatives go nuclear?  Who is feeling the pain?  At what point will the bond bubble collapse?

The thing about these chicken little articles about an epic collapse is timing.  At what point will the rising yield unleash the Four Horsemen of the Apocolypse?

Its a mystery to me.

midtowng's picture

It'll happen, but its impossible to predict when. The central banks will defend the bond bubble with everything they have. After all, it's their necks on the line when it comes to bonds.

And we've seen over the last 5 years what the CBs are capable of. This could go on for a long time.

andrewp111's picture

3% is nothing. A normal rate of 10y UST is 6.5%. I am sure the big boyz can hedge the prospect of a 6%  rate with derivatives. The only thing they can't handle is a spike that goes outside of range in a short time frame. And what could cause that? I see only one thing that could - the prospect of an imminent major war. If a Japan-China war starts and threatens to go nuclear, I could see the 10y UST going above 15%.  Who wants to invest in obligations of a government that might not be around after the missiles fly.

[Actually, if you live in the US and have nowhere to go, that would be a very good investment. If the missiles fly you are dead anyway, and if not you get good income. But for a foreigner?? Not so much. The prospect of imminent nuclear war would cause all foreigners to mass dump UST of all but the shortest maturities.]

Ham-bone's picture

I'll disagree a little...rates aren't about the absolute rate but the relative rate vs. a year ago, 2 yrs ago...and the US has had a period of 34 yrs now of declining rates...which happens to coincide w/ the incurring the largest debt bubble in history...but it's been ok cause every year .gov or corporations or homeowners or strip malls have been able to rollover or refinance at ever lower rates...makes up for a lot of missing wage gains or otherwise absent profits or missing taxes...but but but if 1.6%'ish was the bottom and we have begun a rising interest rate period all the sins will be revealed and 3% will hurt...3.5% will be brutal...4% would send the system into panic all because the debts taken on during this period are alll still there, waiting to reverse all those profit enabling "gains" that declining rates provided...

Actually, 3% is probably bout as far as rates can go without the system starting to lock up and suffer potential Ponzi trublums.

BTW - the debt load in the system now is so much higher than ever before, the growth potential is relatively much all the debt in the US, Spain, GB, etc. will require ever lower rates ala Japan to allow the continuation of this system...3% is likely bout the counter trend limit before the next lower low in yields...Fed seems to know that their programs don't hold yields down but instead boost asset prices while maintaining low rates...absent the Fed's actions rates would be very low but asset prices would be less than half of current.

chubbar's picture

Every 1% increase in interest rates requires another 170 billion in gov't debt interest payments. The gov't takes in what, around 2 trillion in taxes and spends another 1 trillion in deficit spending (someone jump in here with the real numbers)? My math says an interest rate of 11% or so requires every penny of taxes to service gov't debt. See a problem here? Well before interest rates get to 11% you are going to see a gov't default on it's debt or more likely, a derivatives blow up that shuts down the international banking system. Do you think that a gov't currency gets stronger or weaker when the gov't backing said currency defaults on it's obligations? OR, conversely, do you think a currency gets stronger or weaker when a gov't prints the trillions required by higher interest rates to service the increase in debt payments? OR, do you feel that a shut down of the international banking system due to a blow up of derivatives tends to validate the integrity of the currency being used in that system? 

Flakmeister's picture

Almost on par with 

"Coming Epic Annihilation of the Earth"

So we know that the planet will fry in about 4 billion years, but that info is basically useless and doesn't help us one bit... 

Payne's picture

Debt stays cheap especially if Gold and Silver perform horrible.

The Wisp's picture

Gosh you don't think it's corruption, red tape & taxation that is stifling business do you ?  Nah, has to be something Simple..

LawsofPhysics's picture fact it is much simpler.  In order for my business to actually do anything, we need to input energy.  Have my energy costs been going down?  I think not.

Duude's picture

"This is why large investors like Bill Gross have applauded the Fed’s policies at first (when the deleveraging was about to wipe him out in 2008), but then turned against them in the last few years as a political move."


A political move? LOL! Bill Gross has actually become more liberal the last few years, which makes this an especially ridiculous statement.  If his reversal is for selfish reasons its because he's a bond buyer and bonds are going to suck for some time.  Otherwise, I would reason he flipped because he thought QE went on too long. 

Bosch's picture

Also concerned about interest rates is because no entity (US Gov't included) or household can withstand a massive (& proper) increase. 

Dr. Bonzo's picture

Brilliant summation.

Take away credit and easy monetary policy and a lot of very “wealthy” people suddenly are not so wealthy.

It seems so obvious to some of us... but apparently utterly lost on the rest of the herd. AH! But... the fabric of civilization must be undone. Come come children... there's work to be done. 250 years of history needs to be flushed down the toilet for the sake of some asshats in the Hamptons.



Phat Stax's picture

Say what you will about the on-going drum beating, but this analysis about debt accumulation is spot on.

Global Observer's picture

The Fed is not trying to create growth in employment, it has no instruments that can do that. Growth in employment will occur with new business investment, which will not happens because every businessman knows there is no potential left for economic growth in the US or anywhere in the West. All the Fed is doing is blowing asset bubbles that will leave the US economy in a permanent depression when they burst. When most of this fictitious wealth held in financial instruments is wiped out, the government will step in to "solve" the problem by direct money injection into the system through spending that will result in hyperinflation and currency collapse. Then people will accept that there is nothing that can be done by the Central Bank or the government to "solve" the problem and start doing something themselves. Not that everyone will succeed, but only that no one will be waiting for someone else to solve their problems for them.

LawsofPhysics's picture

Simple put, when fraud is the status quo, possession is the law.  "Resets" are always messy, hedge accordingly.

eddiebe's picture

Right, any day now.