THIS MONETARY UTOPIA WILL SELF-DESTRUCT
http://blogs.wsj.com/economics/2015/02/17/did-shakespeare-make-the-wrong-decision-going-into-liberal-arts-and-not-finance/
Sometimes you have to listen to what you don’t want to hear. Because if you don’t, it could be the end of the road of your way of life. All is not well in the international monetary system. In fact, the end of this system, as we know it, is now in sight. Just take a look at what happened to global interest rates since 3000 BC! Already, trillions worth of international bonds carry negative yields today. The unthinkable is happening right in front of our eyes. The global monetary system is headed for an historic systemic failure.
Global interest rates are falling into the abyss. It’s harmful enough if savers lose their return on their capital and, with negative rates, are being penalized for having capital at all. But it’s disastrous if creditors can no longer obtain a profit from the spread between short and long rates. Short-term credit will have to become exorbitantly expensive in order to compensate for a potential negative cash flow problem. Most creditors, however, have little capital and are hugely leveraged. For the vast majority, bankruptcy is around the corner.
Lending can no longer be subsidized by ‘riding the yield curve’ as it flattens, when short and long rates converge. The ‘real’ cost of money will rise substantially. This will accelerate credit contraction, as borrowers, who are able to do so, pay down their debt or default, if they are overstretched. If the yield curve then inverts with short rates leaping up above long rates, the stage is set for a complete breakdown of the financial system. The velocity of money, which stands for the frequency with which a unit of money is spent, and which has been declining since 1997 and collapsing since 2007, will pick up speed on the downside, further adding to severe deflationary pressures.
Also, the main investors in longer term bonds, pension funds and insurance companies, will be faced with no return on, and with a relatively abrupt, exhaustion of their capital. They will go bankrupt. The size of the global bond market is at least $ 100 trillion, which is the essential collateral for the extension of credit and for maintaining the derivative market of at least $ 700 trillion. As debt is money, the whole current monetary system could implode and pass into oblivion.
The 2008 credit crisis, which only affected 10% of the total derivatives market, was just like a lightening bolt, flashing through the sky. The following thunder will be the first stage of the great unwinding of the generational Credit Super Cycle and will put an end to all the global asset bubbles, which temporarily resulted from the frantic monetary stimulus of the Central Banks. A global economic depression, much worse than the one during the 1930’s, will occur virtually overnight and looks now absolutely inevitable.
RICK SCHMULL
February 18th, 2015
WESTCLIFF-On-SEA, Essex, U.K.
=
