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Next Crisis: Worldwide Government Bond Crash

Kirk Bostrom at Strategic Preservation Partners LP warns that a global government bond crash is finally under way.

Bostrom sees the same indicators ominously flashing that proceeded the 2001 Dot-com crash and the 2008 real estate crash. With cyclical financial market downturns occurring about every 7 years since 1973, Bostrom sees government bonds as the latest Ponzi scheme about to crash.

There is an old saying on Wall Street: “The larger the asset bubble, the less people will see it.”

In the last 45 years, the U.S. has suffered a series of private-sector boom and then bust cyclical declines about every 7 years. The “cycle” features an asset class rising on improving fundamentals, leading to leveraged speculative buying; which stimulates massive expansion of asset production; followed by a glut that leads to a price crash; which re-establishes reasonable asset valuations. Unfortunately, the public seems shocked each time these recurring cycles happen.

But rather than allowing the 2008 private-sector real estate crash to re-establish reasonable asset valuations, the U.S. government used massive deficit spending to re-inflate asset values.

The Obama administration bailed out real estate investors in a spectacular spending spree that almost doubled the federal debt in 6.5 years from $10 billion to $19.2 billion. At a 10.6 percent annual growth rate, only World War II saw slightly faster debt expansion.

With the U.S. giving credibility to deficit spending since 2008, government debt in the other advanced economies has increased by $11 trillion and developing country government debt increased by $6 trillion, according to McKinsey & Company.

Despite interest rates falling by almost by 65 percent since 2008, the vast majority of all that government debt around the globe is only capable of making interest and principal payments by selling more government bonds.

Bostrom warns that the normal 7-year cycle that began in 2009 is almost complete. He believes that the massive debt and leverage that precipitated the housing and credit crisis of 2007 to 2009 has never gone away; “[I]t has simply shifted from primarily a private sector problem to an even larger public sector one today.”

What started out as a Greek debt crisis in January has metastasized into global crisis, as China suffered a $1 trillion dollar loss from a stunning $3 trillion stock crash, export plunge, and devaluation over the last eight weeks.

With China slashing imports by a third, commodity prices are plunging across the globe. Once high-growth, resource-driven economies in Brazil and Australia are rapidly becoming insolvent. Even once spectacularly rich Saudi Arabia is burning cash at such a high rate that it will be broke in just four years.

In a booklet entitled Modern Money Mechanics, the Federal Reserve Bank of Chicago states: “In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount.”

Bostrom warns that financial liquidity evaporating around the world is like the dying canary that warns miners to run for their lives. With no intrinsic value to back government debt, the clock is ticking on what could be an epic government bond crash.

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