During the 2006-9 financial crisis, a collapse of the global financial system was avoided by massive money printing, guarantees and allowing banks to value assets at cost rather than market, as well as a panic lowering of interest rates from as high as 6% in the US to zero or negative. Bonds issued by eight major countries currently have negative interest rates from 1 & 2 year debt for Italy up to 15 & 30 year debt for Japan, Germany and Switzerland.
GLOBAL LIABILITIES OF $2 QUADRILLION
Whatever central banks and politicians say, nothing has been solved. On the contrary, risk has grown exponentially since 2006. Global debt has doubled to around $230 trillion since then. If global unfunded liabilities of $250 trillion and derivatives of $1.5 quadrillion are included, the world is now staring at total liabilities and risk of $2 quadrillion.
When the next crisis starts, which is likely to be in 2018, what central bankers have to focus on is not just global debt but also the derivative bubble. Banks will of course argue that the net derivative figure is much smaller. But in a crisis, gross will remain gross as counterparties fail to settle their obligations.
With this background, central bankers must be living on a different planet if they believe they can reduce their balance sheets. Debt in coming years, whether it is government or private debt will go up faster than any time in history.
Just take the US. It is no accident that Jerome Powell will take over from Yellen as Chairman of the Fed. He is a safe pair of hands and has been a Fed governor for five years. He is the perfect choice for expanding the Fed’s balance sheet infinitely.
US Federal debt is guaranteed to continue to double every eight years as it has done since 1981. That means the US debt will go from $20 trillion when Trump took over to $40 trillion by the end of 2024. Even the Central Budget Office’s forecast is not far from that $40 trillion. But we must remember that this figure doesn’t include all the problems that the US and global economy will experience in the next few years.
EUROPEANS WILL LOSE ECB PROTECTION
And in Europe, Draghi has now made it clear that the Protection Deposit Scheme is no longer necessary. Thus the ECB will no longer guarantee customer deposits up to Euro 100,000. This should come as no surprise. When the crisis starts, no depositor will get real money back from any bank.
When the crisis that temporarily paused in 2009 resumes in earnest, there will be money printing on a scale that the world has never experienced before. That will be the time when the world will learn that “Quadrillion” as a word actually exists although no one can imagine the magnitude of that word.
To put it in perspective, $1 Quadrillion is 15 years’ global GDP. So if global debt goes to $1Q after central banks have tried to save the system, including most derivatives, we would have to spend the next 15 years using the total gross production of the world just to repay the debt. Thus it would mean 100% tax for 15 years.
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