Prepare For Interest Rate Rises And Global Debt Bubble Collapse

GoldCore's picture

Prepare For Interest Rate Rises And Global Debt Bubble Collapse

 - Diversify, rebalance investments and prepare for interest rate rises
- UK launches inquiry into household finances as £200bn debt pile looms
- Centuries of data forewarn of rapid reversal from ultra low interest rates
- 700-year average real interest rate is 4.78% (must see chart)
- Massive global debt bubble - over $217 trillion (see table)
- Global debt levels are building up to a gigantic tidal wave
- Move to safe haven higher ground from coming tidal wave

Editor: Mark O'Byrne

Source: Bloomberg

Last week, the Bank of England opted to increase interest rates for the first time in a decade. Since then alerts have been coming thick and fast for Britons warning them to prepare for some tough financial times ahead.

The UK government has launched an inquiry into household debt levels amid concerns of the impact of the Bank of England's decision to raise rates. The tiny 0.25% rise means households on variable interest rate mortgages are expected to face about £1.8bn in additional interest payments whilst £465m more will be owed on the likes of credit cards, car loans and overdrafts.

The 0.25% rise is arguably not much given it comes against backdrop of record low rates and will have virtually no impact on any other rate. However it comes at a time of high domestic debt levels, no real wage growth and a global debt level of over $217 trillion.

Combined with low productivity across the developed world, experts are beginning to wonder how the financial system (and the individuals within) will cope.

After a decade of seeing negative real rates of interest many investors will be quietly celebrating that they may be about to see a turnaround for their savings. Many hope they will start being rewarded for their financial prudence as opposed to the punishing saving conditions of the last decade.

In reality this will not be the case, at least for some time. Savers and investors alike need to begin to prepare their portfolios for interest rate rises against a backdrop of crisis-triggering debt levels and unproductive economies.

Economies are junkies addicted to credit

Unsurprisingly, credit levels are equal to the increase in private debt every year. Credit is when people spend money that isn't their own but instead borrow from banks. The bigger private debt levels are compared to a country’s GDP, the more the economy is dependent on credit.

Economic growth becomes addicted to credit. Therefore, the bigger the accumulated debt is when compared to GDP, the more likely it is an economic crisis will happen when credit levels are reduced.

An increase in interest rates means a decrease in credit levels. Especially in countries such as the US and UK where there has been no increase in real wage rates and there is a generation unprepared for an increase in the price of debt.

Consider the UK. When Mark Carney announced a decade-first increase in interest rates it was by a meagre  0.25%. Panic hit the newspapers; how would people with variable mortgages manage?

No one thought to ask, what are people who cannot manage a tiny increase in the cost of debt doing being allowed to borrow in the first place?

Currently debt-to-GDP ratios in the UK are not quite at pre-crisis or Great Depression levels. However they are fast approaching and they are at those levels globally. This combined with rising levels of interest rates makes for a tricky future and one that places savers and investors capital at risk.

700 year data forewarns of sudden interest rate turnaround

According to Bank of England guest blogger Paul Schmelzing as reported by Bloomberg the 700-year average real rate (the benchmark interest rates minus inflation) over the last 700 years (see chart at top) has been 4.78% and the average for the last two hundred years is 2.6%. Unsurprisingly he notes “the current environment remains severely depressed”.

More worryingly Schmelzing believes we have been in a downward trend for the last 500-years.

Upon closer inspection, it can be shown that trend real rates have been following a downward path for close to five hundred years, on a variety of measures. The development since the 1980s does not constitute a fundamental break with these tendencies.

Why is this worrying? Because the bounce back is not only inevitable, but will also be painful and sharp:

Most reversals to “real rate stagnation” periods have been rapid, non-linear, and took place on average after 26 years. Within 24-months after hitting their troughs in the rate depression cycle, rates gained on average 315 basis points, with two reversals showing real rate appreciations of more than 600 basis points within 2 years.

How will we know if such a correction is headed our way? Aside from the fact that central banks are beginning to increase rates of their own volition there are other macro indicators, many of which resonate with the current environment:

Most of the eight previous cyclical “real rate depressions” were eventually disrupted by geopolitical events or catastrophes, with several – such as the Black Death, the Thirty Years War, or World War Two – combining both demographic, and geopolitical inflections...the infamous “Panic of 1873” heralded the advent of two decades of low productivity growth, deflationary price dynamics, and a rise in global populism and protectionism.

Sound familiar?

$217 trillion global debt bubble set to pop

Currently the total global debt bubble is over $217 trillion, with little sign of it slowing. We have built a so-called economic recovery on debt. Spending has been encouraged on a pile of low interest rates and easy-to-reach cheap lines of credit. It has not been encouraged with the thought that one day interest rates will have to climb.

A sudden uptick in interest rates could not come at a more precarious time for global finances. It is not just personal debt levels that are of concern, especially when the Bank of International Settlements is aware of $13 trillion of 'missing debt'.

 

In September this year the BIS  said it was hard to assess the risk this “missing” debt poses, but its main worry was a repeat of events in the financial crisis: a liquidity crunch like the one that seized FX swap and forwards markets.

It is safe to say that a decade on from the global financial crisis we now have the makings of a new one.

Global debt woes are building up to a tidal wave

As Dambisa Moyo explained in the FT in 'Global debt woes are building up to a tidal wave':

In November last year, unsecured household debt in the UK passed pre-financial crisis highs in 2008. In the UK, debt excluding student loans crept up to £192bn, the highest figure since December 2008, and it continues to rise this year. Meanwhile, in the eurozone, debt-to-GDP ratios in Greece, Italy, Portugal and Belgium remain over 100 per cent. As of March there were more than $10tn negative yielding bonds in Europe and Japan.

With or without moderate interest rate increases, debt on a global level is becoming more expensive as markets price in further rate hikes. Add to this the global imbalances we see across the globe it is becoming increasingly questionable how so many countries will manage to service these debts.

Clouded judgement of central bankers

When the Bank of England's Mark Carney issued a statement following the 0.25% increase, he was clearly down about the future prospects for the UK. He was so wary about encouraging any kind of positivity regarding Brexit and the country's productivity that he almost warned against sharp future rate rises. The pound dropped unexpectedly in the wake his candidness.

What's worrying to investors is that Carney (and other fellow bankers) seem to feel interest rate rises are almost to be done at whim. In truth, they are unlikely to have much more time before they are forced to hike rates and then it will be far more dramatic than a gesture of 0.25%.

This is worrying because the economy is unlikely to be strong enough to handle such a change. In turn this will impact economies, financial markets and assets - especially risk assets.

Many economists argue that it is only growth that can pull us out of this situation but we now live in a world where we only know how to create growth from debt. We do not know how to grow a healthy economy without the dripping syringe of the current debt based banking and monetary system.

This is the case both in people's homes and in the highest government offices. It is an epidemic of global proportions.

Investors need to protect themselves from the addictive nature of these behaviours. We all know what happens to those who are unable to cut themselves off. They find excuses and then they come knocking for help. This is where you must ensure your finances are protected. and you are not forced to "help" the reckless bankers and their dangerous monetary system.

Move to safe haven higher ground from coming debt tidal wave

As we have discussed previously, the global debt bubble is prompting the wealthiest to diversify into gold. Wealthy investors and some of the world's largest institutions in the world, including Lord RothchildsRay Dalio and insurance company Munich Re, have all expressed their desire to protect their portfolios from the next financial crisis.

The next financial crisis may well be preceded by something we did not experience ten years ago but is now a very real scenario - bail-ins. As banks struggle to retrieve payments from those unable to service debts they will begin to falter. Governments will need to step-in. 'Luckily' for them they had the foresight to agree that bail-ins could happen.

This places your investments and especially your deposits at arguably greater risk than before the first financial crisis. With this in mind, follow the likes of Munich Re and prepare your portfolio against counterparty risk, unforeseen consequences of interest rate climbs and the collapse of the global debt bubble. Avoid ETF and digital gold and dependence on single counter parties and have outright legal ownership of segregated, allocated gold bullion coins and bars.

Related Content

Gold Protect From $217 Trillion Global Debt Bubble

Global Debt Bubble Sees Wealthy Diversify Into Gold

World Is Now $199 Trillion In Debt

 

News and Commentary

Gold holds steady at near three-week high as dollar firms (Reuters.com)

Asia Stocks Test Record High, Extend Global Rally (Bloomberg.com)

Indian Silver Imports Spiked 152% in September (SmaulGld.com)

Palladium just settled above $1,000 an ounce for first time since 2001 (MarketWatch.com)

Bitcoin surges to new high on reports software ‘fork’ suspended (Reuters.com)


Source: Bloomberg

America’s ‘Retail Apocalypse’ Is Really Just Beginning (Bloomberg.com)

A Monstrous Bubble - The Destroyer Called Amazon (InvestmentWatchBlog.com)

Central Banks Will Destroy The Planet - Nomi Prins (Youtube.com)

World's witnessing a new Gilded Age as billionaires’ wealth swells to $6tn (TheGuardian.com)

We Are Reaching A Point Of No Return - Ron Paul (GoldSeek.com)

Gold Prices (LBMA AM)

09 Nov: USD 1,284.00, GBP 980.98 & EUR 1,106.29 per ounce
08 Nov: USD 1,282.25, GBP 976.82 & EUR 1,105.43 per ounce
07 Nov: USD 1,276.35, GBP 970.92 & EUR 1,103.28 per ounce
06 Nov: USD 1,271.60, GBP 969.72 & EUR 1,095.61 per ounce
03 Nov: USD 1,275.30, GBP 976.24 & EUR 1,094.59 per ounce
02 Nov: USD 1,276.40, GBP 965.09 & EUR 1,095.92 per ounce
01 Nov: USD 1,279.25, GBP 961.48 & EUR 1,099.52 per ounce

Silver Prices (LBMA)

09 Nov: USD 17.10, GBP 13.03 & EUR 14.69 per ounce
08 Nov: USD 17.00, GBP 12.96 & EUR 14.65 per ounce
07 Nov: USD 17.01, GBP 12.95 & EUR 14.70 per ounce
06 Nov: USD 16.92, GBP 12.90 & EUR 14.59 per ounce
03 Nov: USD 17.09, GBP 13.05 & EUR 14.67 per ounce
02 Nov: USD 17.08, GBP 12.98 & EUR 14.66 per ounce
01 Nov: USD 16.94, GBP 12.74 & EUR 14.55 per ounce


Recent Market Updates

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- German Investors Now World’s Largest Gold Buyers
- Gold Price Reacts as Central Banks Start Major Change
- Why Switzerland Could Save the World and Protect Your Gold
- Invest In Gold To Defend Against Bail-ins
- Stumbling UK Economy Shows Importance of Gold
- Wozniak and Thiel Fuel Bitcoin-Gold Debate: Gold Comes Out On Top
- Russia Buys 34 Tonnes Of Gold In September
- Gold Will Be Safe Haven Again In Looming EU Crisis
- Gold Is Valuable Due to “Extreme Rarity” – Must See CNN Video
- Gold Is Better Store of Value Than Bitcoin – Goldman Sachs
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Important Guides

For your perusal, below are our most popular guides in 2017:

Essential Guide To Storing Gold In Switzerland

Essential Guide To Storing Gold In Singapore

Essential Guide to Tax Free Gold Sovereigns (UK)

Please share our research with family, friends and colleagues who you think would benefit from being informed by it.

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Agent44's picture

Just hope I'm heavy short at the right time ;-) I hope you are, too, unless you are a mean poopy-head.

Let it Go's picture

With the markets sporting a glow from all-time record highs that are being made week after week it might be a good time to revisit the concept of irrational exuberance. We must consider the possibility we may be nearing the end of a 37-year run that will completely upend everything most people have come to believe about the economy. Since 2008 all growth has been built on a mountain of debt.

Those of us who have doubted and repeatedly predicted the collapse of this so-called recovery remain wrong because we have underestimated both the breadth and size of the global intervention of central banks and governments. Nobody in their right mind would have ever anticipated the sheer magnitude and scope of what has become a worldwide phenomenon. The article below questions when the burden of global debt will cause Atlas to shrug.

 http:/When Will Atlas Shrug Off Burden Of Global Debtl.html

mosfet's picture

CB's will never voluntarily allow interest rates to rise.  They'll be able to hold them down as long as there's value left in the local currency to print & suppress rates.  It'll be asset prices (not rates) that rise.  Watch Japan as it's starts to hypeinflate...go cashless...and institute regular revaluations of the currency.  Those will be the early days of 'devaluation management' and the other CB's will sit back and take notes.  Everyone will be forced into markets, hard or digital assets. Those who figure out how to diversify into multiple assets sooner vs later will be the most likely winners.

First world countries won't avoid hyperinflation they'll perfect it.  Sovereign debt cancellation will become a commodity traded or negotiated between countries.  Inflation will be moot cause (once fully digitized & cashless) the currency itself can be imbued with an expiration date; no different than food or batteries.  They'll be able to print endlessly while the cash in your account disappears if you don't use it.  Money velocity will be compelled because the act of savings will be futile.  Price inflation will become 'maneagable' as CB's fine tune the length of expiration.  The frogs will accept it all cause the water will only start out as warm.

LawsofPhysics's picture

LOL!!!

Sorry, there is no monetary "solution" to scarcity.


HamFistedIdiot's picture

If the sheep will accept fake wild fires, fake lone wolf mass shootings, fake lunar landings, fake cloud cover, and fake vaccinations, it necessarily follows that they will accept fake (debt-based) stores of their wealth.

venturen's picture

Normal died when Obama was elected 

InnVestuhrr's picture

I lost track, is this the 10,000,000th time this doom has been predicted ????

indygo55's picture

Debt to GDP is BS. The GDP number includes healthcare and is adjusted for so many fucked up things its no longer usable except to feed to the sucker public a load of bull shit. China passed the US a while back by my reconing, we just can't admit it. 

Boeing Boy's picture

Nah, you never run out of zeros...

Antifaschistische's picture

and...for how many of those 700 years were the central banks committed to overpricing debt and buying everything with their counterfeited electronic fiat?

The ECB and the FED can go full Japan....and they probably will....10 years from now, the Fed may own 50% of all US Equities.  who knows....they could keep that party going for a long time.

...of course, other things will blow up if they do, but don't bet on seeing 4.78% interest rates anytime soon. 

JibjeResearch's picture

I have similar feeling.....

I see basic income coming...

They will not freely giving it out... like free money...

This basic income is in the form of bailing out Pension, 401K, and Gov-bonds.

For the rest of the folks that don't have a piece of this pie, they will have to work....

 

I don't think this is an "if", it's a "when" because it's the only way... the whole system doesn't come down crashing... making everybody looks bad...

Greenspazm's picture

This can't be true unless James G. Ricktards said it

Kat Daddy's picture

The Bankers prepare to collect their chips and take the collateral!

Goldbugger's picture

Captialism in it's finest hour.

Antifaschistische's picture

...there's nothing capitalistic about Central Bank interest rate supressing electronic counterfeiting debt invention

JibjeResearch's picture

BAwaaha ahahha ahah ahahahaha....

got Crypto baitchezz?

LawsofPhysics's picture

LOL!!!!  Hey you stupid fuck, you better overly a chart of the human population going back to 1311...

..plenty of demand for real assets and energy.

NOTHING else will matter soon enough.

Spaced Out's picture

Household debt levels?

We need an urgent inquiry into UK government debt levels!

PGR88's picture

Curious - how do we know real interest rates were 25% in 1446?

indygo55's picture

Cuz that there chart says so. So there!

Dukes's picture

US remains the cleanest dirty shirt in this shit show.  

Spaced Out's picture

Unless you take into account all those unfunded liabilities going forward :(

fattail's picture

Those unfunded liabilities can be fixed with the stroke of a pen.  The sheeple will not have a choice, and they deserve all the misery coming to them.

oddjob's picture

That's the stinky wifebeater underneath.

Dragon HAwk's picture

I remember a woman who was so smart, she retired  by simply plunking everything she had into long term 14% cd's.

Anon2017's picture

She would have done better buying 30 year zero coupon Treasuries back in early 1982, but who knew about such things at the time?

JailBanksters's picture

How do you fix a Debt problem, get more debt

BandGap's picture

Just listen to local radio and watch local TV. They will show you how to pay off credit card debt by pushing it over to your housing debt/equity. Genius.

JailBanksters's picture

GE money genie to the Rescue with Pay Day loans

Talk about loan sharks ... every time they get a large lawsuit

they just change the name, now that's Latitude thinking

medium giraffe's picture

*Representative: 1,212.3% APR. Representative Example: Loan Amount: $100 for 35 days, Interest: $28, Interest rate: 292%pa (fixed), One total repayment of: $128 Representative 1,212.3% APR.

Truther's picture

Great. Now BTFD and sit back.

Got gold Bitchezz?

MrBoompi's picture

Having to toil and sweat to make make interest payments on debt that was created out of thin air is the biggest scam the earth has ever seen.  

Crazy Or Not's picture

It will be interesting to see how much  US & China Stats on 1st Graphic reverse in January IF China is able to pull off its Petro Yuan project. 

Buck Johnson's picture

The biggest scam in the world is right.  They could easily get rid of all that debt but it would destroy those bankers that need it to make money.

 

ToSoft4Truth's picture

No, taking care of old people who aren't ours is the scam. 

 

Kill Social Security and perhaps 50% of the debt will be immediately vanished.

 

"Of the $12.9 trillion chunk of debt owned by Americans, $5.3 trillion is held by government trust funds such as Social Security, $5.1 trillion is held by individuals, pension funds and state and local governments and the remaining $2.5 trillion is held by the Federal Reserve.

May 10, 2016"

LightBeamCowboy's picture

Hey, this "old person" would be perfectly happy cashing out of Social Security right now, every cent I ever put in, no interest and no questions asked. Because that's the only way I'll ever collect what I put in, after decades of watching the WWII generation parking their motor homes at casinos to gamble away their windfall.

If the Social Security system had been designed to mandate every American sock away 15% of their lifetime earnings stacking gold or silver instead of designed as a Ponzi scheme, the US would now be the richest country on Earth AND gold and silver would priced within hailing distance of reality.

jughead's picture

take your mandate and shove it up your ass.  Free people don't need mandates...or safety nets.  

auricle's picture

They are going negative before they are going back to trend. 

Squid-puppets a-go-go's picture

Yes, its yet another interest rate normalisation article that does not address the historical shift: We now have Rothschild central banks in almost every nation: where are the 'External Forces' to COMPEL a rate rise upon any central bank? There are none. The bond market and central banks are a closed loop. Extend and pretend for as long as you like. The longer you go the more intra-asset volatility tectonic tension builds up, but hey, if TPTB dont mind that volatility, nothing changes. (Unless they DECIDE to flip the switch to catapault certain oft ignored asett classess into the stratosphere)