Germany is financing debt with negative interest rates. This is the beginning of the end. Seriously. Europe is doomed.
Last week, the German government was paid to borrow money.
This is the new world order. Everything is flipped on its head.
Germany was able to sell 10-year government bonds at a negative yield. That is, investors paid for the privilege of lending Germany money. If you bought these bonds and held them to maturity, you would get back less cash than you originally put in.
No accounting for inflation. Nothing. Nothing but a guaranteed loss.
If there are any of those investors out there, I’m willing to let you lend me money for free! Total bargain. Limited time only.
If this sounds nuts, it’s because it is. Totally nuts.
Think about what it means. We all worry about the budget deficit here, but what if we were being paid to borrow. It doesn’t matter. In fact, the government should just be borrowing as much as it can at those prices. They’d be crazy not to.
New schools, new hospitals, a vitally important netball court? Doesn’t matter. Put it on the tab.
It’s the interest burden that makes debt a time bomb. It grows and grows, and at some point you’re borrowing to pay off the debt. That’s the dynamic that brings governments down.
But Germany doesn’t have to worry about that. There is no interest. In fact, they’re getting paid to borrow. Whee.
But why on earth would anyone pay the German government for the privilege of lending them money?
The answer? What else are you going to do with it? Institutional investors are running scared. They just want to be able to hold on to their money. In a world where it looks like you could lose your money at every turn, the promise of getting 99% of it back in 10-years, starts to look good.
(Also a lot of investment funds are required by their charters to hold a certain percentage of bonds in their portfolio, so they’ve got no choice but to grin and take it in the yield.)
A Contiki tour through Europe is like a trip through an old folks home these days. You never know who’s going to drop off next. Could be Britain thanks to Brexit. Could be Italy thanks to a collapsing banking sector. Could be Denmark thanks to a poor showing at the Eurovision contest.
In this context, Germany, who can still get around without a Zimmer frame, looks relatively spritely. Robust even. As the strongest economy on the block, it enjoys the privileges that come with stability – in this case getting paid to borrow money.
So Germany is laughing all the way to the Bundesbank. But how does the rest of Europe feel about it?
Because while Germany is getting paid to borrow money, Greece is being forced to sell off its ports to the private sector (by the Germans, and oh look, here’s some German investment banks waiting over here.)
And Italian tax payers are on the hook for bailing out the banking sector, and their bond holders, again.
Now, I’m not saying that Germany engineered this situation deliberately, though I am a massive fan of engineering. But how long can this go on for?
Rather than bring Europe together, the EU runs the risk of actually entrenching divisions, and making things worse.
In a world where investors are skittish, they’ll herd towards perceived safety (Germany), while running from perceived risk (Greece.) Greece can’t borrow money at any price. Germany is getting paid to do it.
How do you put a positive spin on that?
Its one of the reasons why Brexit was such a body-blow to the European project. Of all European nations, Britain probably had the least complaint about EU membership. There’s the immigration story of course, but the economy was relatively strong. People were happy to lend to the British Government. Britain wasn’t getting screwed over by suddenly finding itself in the same feeding lot as big countries like Germany and France.
But they voted to leave anyway.
So Britain’s exit must surely have inspired the populations of other, smaller EU countries – countries that are cutting public spending because its become too expensive to borrow money.
In my mind, the European Union is dead in the water.
It’s time to start thinking about a post EU world.
But how do you even prepare for that? What does an orderly EU break up even look like? What does a disorderly one look like?!?
Forget Lehman Bros and the GFC. We’re talking about the removal of the world’s second reserve currency, the break up of one of its largest trading blocks, and most likely in a bitter and spiteful political sh!tstorm.
I don’t even know how to start thinking about it. I’m going to try figure it out… watch this space. But I’d welcome people’s thoughts about to play it. I know we’ve got a lot of cluey investors connected to this blog.
But I think the time to start preparing is now.
I have seen a few people say that now is a good time to go to Gold. That might be true, but are you buying gold in US dollars? What happens to the US dollar when it’s only real competitor suddenly evaporates?
It spikes right?
That means the value of gold denominated assets (like gold) will fall. So gold doesn’t look like a great play to me.
Anyway, the ending has begun. Time to prepare for a Brave New World 2.0.
If Europe goes down, is that good news for Australia? Or Bad?
Graham Wright says
Wow Jon!! You’ve nailed it again – or begun to!! Thankyou. G
Ern says
so if Denmark’s poor showing in Eurovision gives them a C and Germany’s paid lending gives them an A-minor, Italy’s banking problem is a D, Brexit gives an E and Greece is definitely an F…We have all the necessary parts for a House of the Rising Sun…So its all going to “The Animals” in my mind….
Rob says
Very clever Ern – I like it!
Call me crazy.... says
Agenda 21 is in full swing. It is the New World Order. Bankrupt everyone and regain control of the masses. What you describe here was written several days ago from my favourite (pseudo science) astrologist Eric Francis.
Saturn square Neptune, with Mars involved (August 24,
2016, with an orb of 2015-2017). This is a real mash-up, between three
entirely distinct kinds of planetary energies.
Saturn is the planet of form and structure; Neptune is the planet that
dissolves forms and structures. Saturn is about practical, tangible
reality; Neptune is what you dream, imagine or hallucinate. When the two
get together, old things dissolve and new ones are synthesized.
Astonishing view of our old friend Saturn seen from the Cassini Space
Probe. Saturn, looming in the astrological background, comes to the fore
in late August.
We’ve been living with this tension all year, but it’s so subtle
compared to other factors that it’s been lurking in the deep background.
It’s about to emerge into the foreground as Mars makes a conjunction to
Saturn and a square to Neptune August 24-26. Mars, a hot, sharp object,
pushes Saturn-Neptune right to the front of consciousness, just as the
general election season is getting up to full speed.
This aspect pattern describes circumstances that call for careful
handling, because it describes something that looks explosive. If there
are any actual large explosions around this time, they are symbolic of
the pressure we are under, and are trying to release.
This is an aspect that says blow off as much steam as you can, in
advance of its arrival. If you’re facing an important decision, be
mindful of that, and start to create options for yourself. Most of all,
if you’re in denial about something, open up that door before it’s blown
open for you.
Mars-Saturn-Neptune can be brilliantly progressive if you use it
consciously. And that contains one of the keys about how not to go
insane: recognize your resources, and use them with awareness. Recognize
how you feel, and respond appropriately.
steve says
Which goes down first Bundesbank or Italy, either way it’s going world wide an the only way Australia can avoid is to dissolve the corporation and return the constitution to the way it was in 1973.
Peter says
Invest in the UK they are busy doing trade deals with the world something the protectionist EU is incapable of .
Jack says
Come talk to me re crypto currency.
It’s all that’s left.
Jack Henderson.
Ryan says
Jon,
The price of gold may suffer some price declines due to a stronger US dollar but it will ultimately still rise in price due to so much turmoil in the world. The rise in price it will gain will far outpace the rise of the US dollar.
Therefore you still can profit from gold even when the US dollar goes up and gold prices go down. All you have to do is:
1) open a us broker account in Aus ex. http://www.optionsxpress.com.au/ (this is what I use & it has cheap fees).
2) Buy US stock exchange listed gold companies (barrick, GDX etf etc).
As the price of gold goes up the profit of US companies producing gold will also go up thus their share price will rise. With all the other issues (EU break up, China, to much private debt, monetary policy craziness, social unrest the list goes on) gold related assets will do nicely.
Then you have the choice to sell your US stocks in US dollars and convert htem back to Aussie dollars. This will give yo an extra return as the Aussie dollar will only decline in value against the USD.
That is how I am actually playing this out RIGHT NOW and it has been by far the best investment I have had.
Just see all the local and international gold company stock prices. Heaps of them have doubled, tripled on the last year or under.
“Now, I’m not saying that Germany engineered this situation deliberately, though I am a massive fan of engineering” LOL my fav part
Ryan
philipew says
Can’t beat German engineering right? – Look at VW, “Das ingenuity”. OK that one got caught… so, what else is there to find out? Aaah… could never trust the Jerries.
Tom says
Anybody buying gold should make sure that they demand physical gold – in their own hand.
Many brokers sell gold and tell the buyer they will keep it in their secure vaults.
However, they may not actually take delivery of the physical gold. They buy a contract from another vendor.
When the proverbial hits the fan, there will not be enough physical gold available to fulfill all the outstanding ‘paper gold’ which has been contracted.
Buying gold coins or small ingots now may be more expensive than ‘paper gold’, but at least it is ‘Gold gold’ – and will be convertible into buying power, bit by bit, as required, probably after hyperinflation has ruined currencies.
Fortunately for Dymphna’s students, people will still need a roof over their heads. If the properties are debt free, you’re in clover.
George Serghis says
Hi Jon
I do believe that Japan is ahead of Europe in regards to investing your funds with government Bonds for a loss of about 5%, hows that for gratitude and a sense of security.
Sam Dino Soares says
Not sure if anyone has heard of Baba Vanga but she’s blind lady who died 20 years ago, she predicted the fall of Europe in 2016 lol along with other prediction for 2016, so far shes nailded few of them which makes me think shell be right with her prediction of the fall of Europe. One of her other prediction was that 44th president of America will be Black and that he will be last president of America and with Donald Trump looking like hes gonna win America looks like ” Your Fired “