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The Global Debt Bubble Enters Its Blow-Off Stage

People have been talking about a “debt bubble” for some years now. They’ve been right, of course, based on the combination of surging borrowing and plunging rates. But the bubble hasn’t stopped inflating, and recently it entered what certainsly looks like a terminal blow-off stage. Some highlights:

Though July, China’s total debt rose by $2 trillion, a year-over-year increase of 26%. And this month the Chinese government cut bank reserve requirements in an attempt to further rev up lending.

In Japan, the junk bond market is being constrained by banks so desperate for yield that they’re lending directly to companies previously considered too risky. See Japan Junk Bond Market Hopes Crushed by Banks Hungry to Lend.

A recent week of corporate bond issuance was “the biggest weekly volume to hit global markets on record,” according to Dealogic. US investment-grade companies raised $72 billion across 45 deals, equaling the total issued in all of August.

Numerous companies issued 30-year bonds with yields below 3%, which used to be the province of safe haven governments. Even Apple, which is sitting on an epic pile of cash, borrowed money.

At the other end of the spectrum, junk bond issuer Restaurant Brands, which owns the Popeyes and Burger King chains, sold 8.5-year bonds with a coupon under 4%, a record low yield for a US junk issuer.

In Europe sales of new bonds hit $1 trillion earlier than in any previous year. Fully a third of European investment-grade bonds (and some junk bonds) now trade with negative yields. And the ECB is expected to cut rates further at its upcoming meeting.

Why is all this happening? Three reasons:

1) Virtually all the world’s central banks are now easing, sending interest rates to record lows in most major markets. The lure of this ultra-cheap money is proving irresistible even to borrowers who don’t immediately need cash.

2) The world is looking increasingly scary, what with trade wars, military brinkmanship in Asia and the Middle East, and the hint of an incipient global recession. So a massive cash hoard is increasingly seen as a good thing to have.

3) Bubbles generally end this way, with everyone just giving up on self control and grabbing for one last piece of easy money.

All three of these rationales will probably turn out to be mistaken. But that’s just how it goes in financial manias. As Credit Bubble Bulletin’s Doug Noland notes, “It’s difficult to envisage a more manic bond market environment – at home or abroad.”


Emigrate While You Still Can – To Finca Bayano

8 thoughts on "The Global Debt Bubble Enters Its Blow-Off Stage"

  1. While any overnight cash rate of any OECD country is still above zero there will be no denouement on debt. Only once virtually all forms of debt have near zero or negative rates and time preference of debt is eradicated will this come to a head. Before the end US and European banks will be given liquidity (cash) to stabilise the financial system. and it will be the beginning of the (hyperinflationary) end. TPTB will do whatever it takes, to quote Dragi, to avoid a deflationary crash. They will drive this as far as they can, after all they’ve come this far down the rabbit hole and now it’s too tight to turn around.
    When all money has lost its ability as a store of value over time (time preference) the reset will be unavoidable.

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  2. What I don’t understand about all the debt obligations threatening things is central banks can always just “print money” and give it to the debtors to pay off their debts. That may be “inflationary” according to some theories (and common sense) but isn’t that what central banks want to create anyway? I think “helicopter money” in some form is inevitable. I don’t see why anything humanly possible to extend the status quo will not be done, especially since most financial problems are human creations. It seems to me there still a lot of things that could be done, increasingly negative interest rates being just one of them. I’m not saying the absurdities won’t finally cause a systemic collapse but I’ve lost any sense of timing.I thought the last central bank interventions in 2009 would have failed by now so what do I know?

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  4. What seems to be happening is the “succesful” arrangement the Federal Reserve had with its member banks during its QE programs is going global. In review, the Fed paid its member banks for the new Treasury bonds it issued and that money was then deposited at the Fed so the Fed could pay the banks interest on it, the Fed thus acting like a savings account for the banks. It was because the proceeds for the bond sales were literally banked at the Fed, academic types claimed that QE was not a “money printing” scheme because the money never entered the “real economy.” What they didn’t mention, however, is that lowering the Fed rate also encouraged borrowing in the “real economy” and it was the retail and commercial banks that extended those “loans” that entailed the “money printing” that DID enter the real economy. (A bank that extends a loan literally creates about 97% +/- of the loan amount as new money.)

    So this arrangement is now going global since it worked so well for the banks. Basically, just as for the banks during QE where the more money the banks borrowed from the Fed by issuing bonds the more money they made in interest from the Fed, everybody can now get into that gig. As many financial analysts are now saying, businesses and individuals should borrow as much money as they can because it’s a money maker. Borrow, say, a hundred million dollars and put it into a US Treasury bond or CD and net a few mil when you pay back the loan at the end of the term. It’s all baked in and practically riskless! After all, 97% +/- of what gets borrowed is all funny money anyway. It’s brilliant.

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