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Why the Next Crisis Will Be Worse Than 2008
Yesterday I outlined how the next Crash will play out.
Today we’ll assess why this Crisis will be worse than the 2008 Crisis.
By way of explanation, let’s consider how the current monetary system works…
The current global monetary system is based on debt. Governments issue sovereign bonds, which a select group of large banks and financial institutions (e.g. Primary Dealers in the US) buy/sell/ and control via auctions.
These financial institutions list the bonds on their balance sheets as “assets,” indeed, the senior-most assets that the banks own.
The banks then issue their own debt-based money via inter-bank loans, mortgages, credit cards, auto loans, and the like into the system. Thus, “money” enters the economy through loans or debt. In this sense, money is not actually capital but legal debt contracts.
Because of this, the system is inherently leveraged (uses borrowed money).
Consider the following:
1) Total currency (actual cash in the form of bills and coins) in the US financial system is little over $1.2 trillion.
2) If you want to include money sitting in short-term accounts and long-term accounts the amount of “Money” in the system is about $10 trillion.
3) In contrast, the US bond market is well over $38 trillion.
4) If you include derivatives based on these bonds, the financial system is north of $191 trillion.
Bear in mind, this is just for the US.
Again, debt is money. And at the top of the debt pyramid are sovereign bonds: US Treasuries, German Bunds, Japanese Government Bonds, etc. These are the senior most assets used as collateral for interbank loans and derivative trades. THEY ARE THE CRÈME DE LA CRÈME of our current financial system.
So, this time around, when the bubble bursts, it won’t simply affect a particular sector or asset class or country… it will affect the entire system.
So.... the process will take considerable time. Remember from the earlier pages, it took three years for the Tech Bubble to finally clear itself through the system. This time it will likely take as long if not longer because:
1) The bubble is not confined to one country (globally, the bond bubble is over $100 trillion in size).
2) The bubble is not confined to one asset class (all “risk” assets are priced based on the perceived “risk free” valuation of sovereign bonds… so every asset class will have to adjust when bonds finally implode).
3) The Central Banks will do everything they can to stop this from happening (think of what the ECB has been doing in Europe for the last three years)
4) When the bubble bursts, there will very serious political consequences for both the political elites and voters as the system is rearranged.
First of all, this bubble is larger than anything the world has ever seen. All told, there are $100 trillion in bonds in existence.
A little over a third of this is in the US. About half comes from developed nations outside of the US. And finally, emerging markets make up the remaining 14%.
The size of the bond bubble alone should be enough to give pause.
However, when you consider that these bonds are pledged as collateral for other securities (usually over-the-counter derivatives) the full impact of the bond bubble explodes higher to $555 TRILLION.
To put this into perspective, the Credit Default Swap (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).
Moreover, you have to consider the political significance of this bubble.
For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.
This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. This is compounded by the fact that the political process largely consists of promising various social spending programs/ entitlements to incentivize voters.
In the US today, a whopping 47% of American households receive some kind of Government benefit. This type of social spending is not temporary… this is endemic.
The US is not alone… Most major Western nations are completely bankrupt due to excessive social spending. And ALL of this spending has been fueled by bonds.
This is why Central Banks have done everything they can to stop any and all defaults from occurring in the sovereign bonds space. Indeed, when you consider the bond bubble everything Central Banks have done begins to make sense.
1) Central banks cut interest rates to make these gargantuan debts more serviceable.
2) Central banks want/target inflation because it makes the debts more serviceable and puts off the inevitable debt restructuring.
3) Central banks are terrified of debt deflation (Fed Chair Janet Yellen herself admitted that oil’s recent deflation was economically positive) because it would burst the bond bubble and bankrupt sovereign nations.
So how will all of this play out?
The bond markets have already begun a revolt in the Emerging Market space. There we are on the verge of taking out the bull market trendline dating back to 2009.
When this hits, capital will fly to high quality bonds particularly US treasuries. However as the bond market crisis accelerates eventually it will envelope even safe haven bonds (including Treasuries).
At that point the bad debts in the financial system will finally clear and we can begin to see real sustainable growth.
If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.
We made 1,000 copies available for FREE the general public.
As we write this, there are less than 10 left.
To pick up yours…
Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research
Our FREE daily e-letter: http://gainspainscapital.com/
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There have been less than 10 copies, out of a purported 1,000 (gotta make sure to get that comma in there), of your FREE investment report for quite a while now. I just don't see the hurry to get one right away.
I'm no longer convinced this thing blows on its own...
...increasingly, it seems to me that it'll need some help.
What DOES seem clear, is that the longer this goes on, the more deleterious and immense will be the damage.
Phoenix seems to think that, at some point post-crash, 'bad debts will clear and real recovery will begin'.
I see no reason to believe this outcome. The truth is, we have NO idea how this kind of meltdown goes. This is new stuff, even if it were only orders of magnitude different than collapse in the past (eg Great Depression I).
There are many, many differences, then and now, to cover, but suffice it to say, there have never been weaker people, nor a more dangerous time, to have this happen...ever.
Again, there is no reason to believe we would recover. We would be different, we would be transformed, but if we think a cleaned-up mess would result in some kind of 50's-style prosperous new economy (ie a fresh start)...we should think that one over a bit longer.
I seriously doubt that'll be the case ever again. The world is not those people anymore...
...to get started as we are, would be wasting our time.
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Alarmists! Everyone will be paid. Some folks will just have to wait a little while banks and governments get their money together.
See -> Though, the little guy does look pissed off.
Unlucky lottery winner gets IOU from state of Illinois
“You know what’s funny? If we owed the state money, they’d come take it, and they don’t care whether we have a roof over our head,” Rick said, according to the Tribune.
http://www.marketwatch.com/story/unlucky-lottery-winner-gets-iou-instead...
I would not want to get the underwear laundry cleaning bill when Phoenix Capital is finally correct (which will eventually occur, if not soon) after 6-7 years of singing off key the same tune. The flowing forth of relief will be prodigious.
If only we could blame somebody....
Now let me tell you a little history story that might sound actual:
In 1920, Russia had a problem with a little country called UKRAINE
They invaded it and started killing the population.
This triggered a massive emigration of the Ukrainian people to Western Europe and also most of those people went to the promised land.
Now after a while, America was getting into economic problems during the depression and they stopped the ships from entering with all those immegrants. Ukrainian, Polish, Romanian... a shitload of people.
Now, those people ended up in Europe that was also in a depression and high unemployment.
And did I tell you that most of those people where Jewish?
That's why the people started to really hate the Jews because they took the jobs for a very low salary.
And well, to many people, hih unemployment... it brought a guy in Germany to idea's.
And the people loved Hitler for the first 7 years!! He got rid of the Jewish problem!
If you're wondering why America is pro Jews, it's because so many moved there during that period.
But all in all, the people had somebody to hate, nobody during WOII gave a fuck that the Germans killed jews and well, most told on them to the Nazi's.
Believe me, we're living THE PERFECT COPY OF PRE WOII!!!!
This will lead to a massive 7 year depression and a war in the end!!
Millions will get killed.
And then there's a second story to keep in mind:
After the war, Antwerp really became the diamond capital of the world. And they build their shops close to the station and the harbor.
Why?
Because in case something ever happened again, they could leave the country in 1 hour.
That was a very smart move.
Know how to leave the country just in case.
Knowledge is power.
Thanks.
I plan on swimming across the Detroit River, walking across in winter.
Yeah, yeah, blame the J_ws for everything that's wrong. No, really . . . blame the J_ws for everything that's wrong. (Well, lots of things.)
BTW, what is the probability that a non-J_w_sh American will meet and befriend an American J_w?
Infinitesimally small, as J_ws make up no more than 2% of the population and their populations are highly concentrated in NYC metro, Boston, DC, FL, and SoCal.
Therefore, most Americans outside of NYC metro, Boston, DC, FL, and SoCal will never meet or befriend a J_w so as to understand the J_w_sh self-identity and how non-J_ws are perceived.
But if they were to understand . . .
Dude do you have schizophrenia?
yesterday you wrote that you expect a 50% correction- thus to 1000!
2008 meltdown index went to 666- now you are saying this crisis is going to be worse?
Wtf??
Who are you ?
robot?Megatron?
To answer your question ... YES !!
A lot worse.
1) The total Legal Tender Money in circulation is $1.36-Trillion.
2) There is no 'money' sitting in short-term accounts and long-term accounts, they are all Credited Accounts, they are all Bank Debt.
That's $1.36-Trillion to cover $59-Trillion in total credit market debt.
It's gonna be some seriously funny shit when this blows up.......
47% of households might be a low percentage. I suspect it has quietly creeped to 50%