Gov Debt to Trigger Next Great Recession

Fed can’t raise interest rates in an economy built on debt

Image Credits: TBIT/Pixabay.

Last week we reported that the yield curve on US Treasurys had inverted after the yield on the 10-year fell below the yield on 3-year bonds for the first time since 2007 – the cusp of the Great Recession. This has historically been an early-warning sign signaling a recession.

Now we have some more bad news for bond markets – this time on a global scale. The amount of government debt with negative yields has vaulted back above the $10 trillion mark and now makes up a full one-fifth of the global bond market.

According to Bloomberg, the amount of debt trading at nominal yields below zero has hit $10.7 trillion. That’s nearly double from a low of $5.7 trillion in early 2018.

The Federal Reserve’s sudden policy reversal and the “Powell Pause” has pushed yields lower worldwide. According to the Financial Times, “The Federal Reserve’s unexpectedly downbeat outlook exacerbated concerns over the health of the global economy and sent investors scurrying for the apparent safety of sovereign bonds.”

“Bond yields have sagged lower for much of 2019, as fixed-income investors have remained skeptical that growth will pick up again. With economic data still weak and inflation at bay, central banks have been forced to abandon moves to tighten monetary policy.”

It’s basically a function of supply and demand. As more people seek the “safety” of government bonds fearing economic turmoil, bond prices rise. Inversely, yields fall.


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Bank of America Merrill Lynch senior strategist told the FT he found it puzzling that the Fed went even more dovish during the March FOMC meeting than it had been in January.

“Investors are starting to ask what the Fed might know about the economy that the market does not?”

The Fed is not alone in its dovishness. In March, the European Central Bank relaunched a crisis-era bank lending program. Meanwhile, the yield on the German 10-year bond dropped below zero as the country’s economy appears to be on the cusp of a recession.

(Photo by Chris Dlugosz, Flickr)

Late last year, the ECB announced the end of its QE program. The central bank’s QE purchases totaled somewhere in the neighborhood of  2.6 trillion euros. The bank also pushed interest rates below zero. So, what did the EU get for all this stimulus? Not a whole lot. We highlighted the “successes” of ECB QE. And now that the European Central Bank is winding down the stimulus, it already looks like Germany – and a lot of other EU countries – is slipping toward an economic downturn.

Here’s the $64,000 question: why are people pouring money into negative yielding bonds? At some point they are going to figure out losing money over time isn’t a great investing strategy. Perhaps at that point, they will turn to precious metals.

Pundits often knock gold because it is a “non-yielding” asset. And yet, gold actually outperformed the S&P 500 in 2018. Holding a “yielding” asset that is yielding a loss isn’t helping your portfolio.

The growing pile of negative yielding debt is yet another sign we are hurtling toward a crisis. At some point, people will figure it out.

As Peter Schiff has pointed out, given the enormity of the budget deficits and the ever-upward spiraling debt, the Fed had no choice but to call off the tightening. You can’t raise interest rates in an economy built on piles of debt. But the Fed can’t tell the markets that. They will have to figure it out on their own. So far, they seem pretty clueless. But eventually, they will and that’s when the bottom is really going to fall out of the dollar.

“When the Fed has to go back to zero, which it will be doing relatively soon, when the Fed has to go back to quantitative easing, nobody is going to believe that it is temporary again. Nobody is going to buy the Fed’s BS about how interest rates are going to stay low only temporarily and then we’re going to normalize them, and we’re going to shrink our balance sheet. We’re not monetizing the debt. After the recession is over we’re going to shrink our balance sheet back down to where it was before the recession. No one’s going to believe that. They couldn’t shrink a $4 trillion balance sheet. They won’t be able to shrink an $8 trillion balance sheet. If they couldn’t raise rates when the national debt was $22 trillion, they sure as hell can’t raise them when the national debt is $30 trillion.”


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