The Coming Bond Liquidation

Total world debt has been calculated recently at $223 Trillion dollars. World debt has increased some 40% since the crisis of 2008-2009; as I recall, it was about $157 Trillion at that time. The $223 Trillion is actual debt, and does not include the potential debt lying in derivatives of this debt, which is another humongous amount and would become debt should there be any default on the $223 Trillion world debt.

The $223 Trillion world debt is like a huge cloud up in the sky.

It is of vital importance for the world of finance, as it presently exists, that the $223 Trillion world debt continue up in the sky, and that it not be subject to liquidation.

Liquidation and payment are two different things.

Liquidation means that holders of debt seek to exchange the debt they hold, for cash.

The problem for the world's central bankers is to keep the debt cloud up in the sky and avoid at all costs a deluge of liquidation. That is to say, there must be no movement to get rid of bonds in exchange for cash.

World debt will continue to be a massive cloud up in the sky, as long as investors wish to own bonds; since central banks drove down interest rates all over the world to absurdly low levels - even to negative interest rates - prices of previously issued bonds rose to equally absurd levels and thus created huge profits for those who owned those bonds.

World debt is not being paid down and has to grow, because the debt is being rolled-over, and rollovers include interest due. So the debt cloud has to get bigger.

When interest rates tick up, as they did just recently, this is an indication that the market is showing a nascent preference for cash, rather than bonds.

This incipient increase in interest rates is warning that we may see, at some point, a widespread desire to dump bonds for cash; that would mean a jump in interest rates which would lower the prices of bonds, and the fall would cause losses to holders of bonds and other credit instruments which form the debt cloud. Hasty sales of bonds would aggravate the fall in values and reinforce the rise in interest rates. As in all cases of panic, those who panic first have the greater chance of avoiding losses.

There is a further problem: the great majority of investors and the giant investment funds are, all of them, invested in bonds, on which they realized great profits when interest rates began to fall. But if all the big investors are owners of bonds, who are they going to sell their bonds to when they wish to liquidate them and get into cash? These investors are going to suffer big losses, because the prices of bonds will have to collapse. This is going to take place the moment that the investors think that the trend in interest rates is no longer down, but up.

Banking systems are investors in bonds, and bonds make up an important part of their assets. In Europe, if the assets of the banking system fall by only 4%, then the whole European banking system is bankrupt. A collapse in bond prices caused by rises in interest rates would be deadly for the whole European banking system, and if Europe collapses, the rest of the world would have to follow suit.

Interest rates will have to rise, sooner or later; central bankers tremble when they see the slightest sign that interest rates are ticking up. Obviously, the FED and ECB cannot even think of raising interest rates; they are trapped and wait in dread for the deluge of bond liquidation when the $223 Trillion debt cloud hanging over the world turns into a cloudburst.

Hugo Salinas Price is President of the Mexican Civic Association Pro Silver; its website with some articles in English is www.plata.com.mx