The major financial problem tearing economies apart over the past century has stemmed more from official inter-governmental debt than with private-sector debt. That is why the global economy today faces a similar breakdown to the Depression years of 1929-31, when it became apparent that the volume of official inter-government debts could not be paid. The Versailles Treaty had imposed impossibly high reparations demands on Germany, and the United States imposed equally destructive requirements on the Allies to use their reparations receipts to pay back World War I arms debts to the U.S. Government.
Every single mainstream media has the following narrative for the economic crisis in Greece: the government spent too much money and went broke; the generous banks gave them money, but Greece still can’t pay the bills because it mismanaged the money that was given. It sounds quite reasonable, right? Except that it is a big fat lie … not only about Greece, but about other European countries such as Spain, Portugal, Italy and Ireland who are all experiencing various degrees of austerity. It was also the same
The United States and Germany are prepared to engineer a coup in Greece to keep the country operating as a strategic asset on NATO’s vulnerable southeast European flank.“A putsch in Athens to save allied Greece from enemy Russia is in preparation by the US and Germany, with backing from the non-taxpayers of Greece – the Greek oligarchs, Anglo-Greek shipowners, and the Greek Church,” writes John Helmer, the longest continuously serving foreign correspondent in Russia not connected to the corporate media.The primary tip-off something is brewing can be detected by the presence of Victoria Nuland, assistant secretary of state for European and Eurasian affairs, in Athens in March.Nuland, The Guardian reported on March 17, “flew into the capital amid mounting US concerns that the great euro debt crisis has begun to pose a geopolitical threat. Allowed to veer out of control, Greece could end up in the ambit of Russia, financially bereft and without the EU links that keep it bounded to the west. Nato’s south-eastern flank would be immeasurably weakened at a time of mounting global security worries over Islamic fundamentalists in the Middle East.”
Investors tend to respond to impending doom by selling risky stuff and hiding out in safer assets — namely, bonds in places such as Germany and the U.S.There’s a problem with that formula this time around: Traders aren’t so sure they can find anything that’s truly safe right now. So, instead of piling into sovereign debt of developed nations, traders are pulling their money out of those places as the Greek economy teeters on the brink of collapse, Puerto Rico talks about delaying some debt payments and China’s stock market suffers its biggest selloff since 1992.Investors yanked $2.9 billion from European government bond funds last week, more than ever before, and pulled $699 million from short-term investment-grade U.S. bond funds, Bank of America Corp. and Wells Fargo & Co. data show. While these assets have traditionally been havens during rocky periods, they look less appealing now after more than six years of unprecedented monetary stimulus that pushed yields to record lows.
Why is that a problem? Well, the European Central Bank’s bond-purchasing program this year sent yields so low (negative, in fact) that investors revolted, selling German debt in the face of some signs of economic growth and causing unprecedented volatility. In the U.S., the economy has improved enough that the Federal Reserve is planning to raise interest rates this year from virtually zero, where they’ve been since 2008.Debt HeavyAnd nations and companies around the world have taken on unprecedented amounts of debt, all with the hope of igniting some growth, with the results being rather tepid.“All of the mechanisms that function so smoothly when things went wrong, all of those got broken this spring,” said Jim Vogel, an interest-rate strategist at FTN Financial. “No one has confidence that assets are going to go back to their traditional relationships.”
In other words, don’t count on government bonds to be the ballast of your investments through the rockiness that’s coming. Or perhaps that’s already started to arrive.Investors are clearly getting more concerned about a full-blown selloff in assets globally after Greece rejected austerity measures required to receive additional bailout funds, and as the Shanghai Composite Index fell 25 percent from its peak in mid-June.Muni WoesAdd to that Puerto Rico, where Governor Alejandro Garcia Padilla said last week he wants to delay payments on some of the $72 billion of debt amassed by the government and its agencies.
This all seems pretty bad, especially if it’s just a sign of a bigger worldwide problem of too much debt and not enough economic expansion.And investors are certainly getting nervous, returning to government debt to some degree in the past week, sending yields on 10-year U.S. Treasuries down to 2.3 percent from as high as 2.5 percent on June 10. They also stepped away from riskier debt investments, withdrawing almost $3 billion from U.S. high-yield bond funds last week, the biggest outflow of the year, Lipper data show.But they don’t seem ready to re-allocate their money into Treasuries and bunds instead, at least not yet.
Maybe they’ll fully return to the debt if they expect deflation and recession will take hold in the world’s biggest economies. That just seems unlikely at the moment as central banks globally are still committed to their stimulus efforts.So for now, markets have been relatively sanguine Monday as the ECB expanded the assets it would purchase as part of its stimulus, China’s government pledged further measures to support the region’s stock market and Puerto Rico stayed out of default for another day.After all, where will investors run? The government debt that used to be their safety looks more and more treacherous.