Monday, October 17, 2016

A Mile-High House Of Cards
"Central bankers and finance ministers are making behind-the-scenes preparations for a major crisis, all the while publicly promising that 'everything is under control.' They’re fully aware of the severity of the situation. They urgently enacted new bail-in rules earlier this year. I think it’s quite clear the Italian banking system is headed for collapse. I recently spent weeks on the ground in Italy to get the scoop on this explosive story that almost nobody else is talking about. There are potentially severe consequences in the currency and stock markets. In Italy, government spending accounts for a whopping 50%-plus of GDP. But a more accurate debt ratio would exclude government spending from economic output and only include the productive economy. In that case, I believe the ratio would reveal that the Italian government is hopelessly insolvent. I don’t see how it’s at all possible for the government to extract enough in taxes from the productive part of the Italian economy to ever conceivably pay back what it has borrowed. Despite this, Italian government bonds are trading at record-low yields. It’s a bizarre and perverse situation. This is because the European Central Bank (ECB) is intervening in the market through a money-printing program, though the financial media prefers to euphemistically call it 'quantitative easing.' .. The ECB is printing money to buy all sorts of assets in Europe, especially government bonds, including those of Italy. They’re bidding up the price of these toxic assets, bringing yields down much lower than they would be in a free market. Around $1.6 trillion of Italian bonds actually have negative yields. It’s completely insane. It shows the enormous degree to which the ECB has distorted the sovereign bond market. It’s a financial Alice in Wonderland. Given the huge risks associated with lending money to the bankrupt Italian government, the yields on Italian sovereign bonds should be near record highs, not record lows. The only way bankrupt European governments like Italy’s are able to service their mountains of debt is with artificially low interest rates. The situation is so dangerous that even raising rates by a token amount could make paying the interest for the debt impossible. It would collapse the entire system. The ludicrous mismatch between risk and reward is a sign of desperation. I think it’s a sign that we are near the endgame."
- Sovereign Man
link here to the commentary

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