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Talk about a hangover. The world's got $247 trillion of debt hanging over its collective head.
If there's a broken link anywhere along the chain of global connection, or if a big debt can't be serviced, or rolled over, or there's a default, there's one thing I know for sure... Contagion will be swift, and stocks will throw up their gains quickly.
Don't look now, but we're getting to a breaking point thanks to escalating trade wars, emerging markets debts that have to be rolled over this year, and the fact that China's stock market is already in the tank.
It's like déjà vu all over again.
Here's why the gigantic debt pile wasn't a problem until now, and what's happening again that could trigger a massive market sell-off...
The "Extend and Pretend" Method
According to the Institute of International Finance's July 2018 Global Debt Monitor report, household, business, and government debt rose $8 trillion in the first quarter of 2018.
The Debt Monitor calculates total debt at $247 trillion. That's more than 318% of global GDP and a huge burden that's been abetted and simultaneously masked by central banks.
For more than a decade now, central banks across the globe - led by America's private central bank, the Federal Reserve System - flooded markets and economies with cheap money.
Driving down interest rates, even into negative territory, so debt investors actually pay issuers for the privilege of lending them money, allowed weak borrowers, households, companies, and government treasuries to borrow new money and roll over maturing debt instruments with the greatest of ease.
There are only two options indebted borrowers have:
- Pay off their debts when they come due.
- Roll them over by borrowing the maturing amount due.
The latter option is often called "extend and pretend" and is the one used most of the time, especially by companies and governments.
That's pretend, as in "pretend you're eventually capable of paying off what you owe."
Paying off maturing debt requires the wherewithal to pay it off. The borrowing entity must have income sufficient to do what they need to do on a daily basis and put aside enough to pay off their loans.
Without rising incomes, paying off outstanding and mounting debts becomes an increasingly precarious proposition.
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And while some companies are thriving and generating lots of income, personal income growth has been mostly stagnant, and government income from taxes has been falling.
The problem, and it's a gigantic one, is that central banks are pulling back their so-called "accommodation," letting rates rise and in some countries, like the United States, actually raising rates.
Of course, rising rates means borrowers have to pay more to service their debt when they roll it over.
Then there's the incipient return of inflation. Rising inflation puts more pressure on rising rates, creating a negative feedback loop.
History Repeats Itself
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.