The $100 Trillion Trigger That Terrifies Central Banks

January 8, 2015

The world is turning Japanese.

For over 20 years, Japan has been ground zero for the great Keynesian nightmare of Central Planning. Japan’s financial bubbles burst in 1989-1990. Since that time, Japan has seen little to no growth for thirty straight years.

The Bank of Japan has dealt with this by running an effective zero percent interest rate policy and implementing over NINE different QE programs amounting to an amount of money equal to over 50% of Japanese GDP.

Throughout this period, neither Japan’s GDP growth numbers nor its employment growth numbers have improved significantly.

In the simplest of renderings, Japan has proven point blank that you cannot fight an epic debt bubble by making debt cheaper. The facts are right out in the open for all to see.

However, this has not stopped Central Banks form around the world from implementing the exact same failed policies to fight their own bouts of deflation.

Globally, Central banks have cut interest rates over 500 times and printed over $11 trillion to combat the brief bout of deflation that ran from 2008-early 2009.

The results have mirrored those of Japan’s post 1990: anemic growth and chronically high unemployment. By all measures, the “recovery” post 2008 for much of the world has been the weakest in the post-WWII era.

Rather than trying something new, Governments and Central Banks have resorted to simply printing more money. And they’ve dealt with the slow growth by simply fudging their economic data to the point of it being outright laughable.

All of this makes no sense at all until you consider that ALL of their actions have been focused on one thing: making sure the global bond bubble DOESN’T IMPLODE.

When stocks crash, investors go broke.

When bonds CRASH, entire countries go bust.

This is why Central Banks have done everything they can to stop any and all defaults from occurring in the sovereign bonds space. Indeed, when you consider the bond bubble everything Central Banks have done begins to make sense.

  • Central banks cut interest rates to make these gargantuan debts more serviceable.
  • Central banks want/target inflation because it makes the debts more serviceable and puts off the inevitable debt restructuring.
  • Central banks are terrified of debt deflation (Fed Chair Janet Yellen herself admitted that oil’s recent deflation was an economic positive) because it would burst the bond bubble and bankrupt sovereign nations.

This is also why globally the bond market has TRIPLED in the last 15 years: as bonds come due, bankrupt Governments have been forced to issue MORE debt to pay back bondholders.

This, in turn, has driven the rise in leverage in the financial system. As the risk-free rate fell, so did all other rates of return. Thus investors turned to leverage or using borrowed money to try to gain greater rates of return on their capital.

This bubble, literally dwarfs all other bubbles. To put this into perspective, the Credit Default Swap  (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).

When this bubble bursts, 2008 will look like a picnic.

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Graham Summers is Chief Market Strategist for Phoenix Capital Research, an independent investment research firm based in the Washington DC-metro area with clients in 56 countries around the world.

Graham’s clients include over 20,000 retail investors as well as strategists at some of the largest financial institutions in the world (Morgan Stanley, Merrill Lynch, Royal Bank of Scotland, UBS, and Raymond James to name a few). His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Glenn Beck Show and more.

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