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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 is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains.Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.