Record low interest rates and record high debt levels are a marriage that history tells us won’t last long.

This is a lesson European bondholders have already learned. And it is one that will likely unfold in the U.S. Treasuries market, the supposedly safe haven from the panic gripping European bond markets these days.

In Europe, holders of sovereign debt have already seen how soaring debt levels crush bond prices. Bond yields soared to over 20% on Greek debt as bond holders were compelled to take a voluntary 50% haircut on the face value of their bonds.

While technically not a default, the 50% markdown of the value of Greek bonds is no different than a default for the country’s short-changed creditors. Even worse, since the markdown on the value of the bonds was voluntary, credit default swaps bondholders bought to insure against the risk of default offered no protection at all.

Looking at what happened to Greek bonds, it is not difficult for global fixed income   markets to worry that Italian or Spanish bondholders will be soon asked to take similar voluntary haircuts. Both countries’ bond yields are approaching the 7% threshold that saw Portugal, Greece and Ireland exit the bond market and turn in desperation to their Eurozone partners for bailouts.

While Italy’s deficit is modest-sized, its debt is huge. It is the largest in the Eurozone, measuring in excess of the country’s gross domestic product. Should it or Spain require the same kind of assistance Greece, Portugal and Ireland have already received, markets fear the Reichstag will once again demand a pound of flesh from bondholders in exchange for further financial assistance from German taxpayers.

That may well explain the flight of capital from European bond markets, but it hardly justifies where the money has been fleeing.  The flow of capital pouring into the U.S. Treasuries market pushed 10-year yields recently below two per cent.

But the debt laden U.S. Treasuries market is an unlikely sanctuary from Europe’s fiscal problems. The U.S. federal debt-to GDP ratio has almost doubled to 74% over the past couple of years.

And America’s debt ratio is only going higher in the near-term. With the so-called Super Committee in Washington striking out on a last minute bipartisan effort on a deal on future budget cuts, it is safe to say that America’s huge budget deficit isn’t going to be getting any smaller until after next year’s presidential elections. By that time, Washington will have just run up another trillion dollars or so of debt.  That’s hardly a sanctuary from default risk.

  • Namaste

    deflation, inflation or stagflation?

  • Doug Stewart

    hey jeff, got any bad news?

  • Jlow646

    Bailouts are bandaids and they will only buy time. The US and Europe will discover you cannot cut your way out of this mess. It didn’t work in the 1930′s and it won’t now. Both will have to create demand and hope they grow fast enough, before the roof falls in.

  • Price

    The whole problem boils down to, in most ways, factors Jeff cited in his book. The repayment of the huge debt which all these countries (including Canada) have built up has been predicated on future growth of the economy-this hoped for growth requires the availability of energy at price levels of the 1960′s–at the cost of energy today the growth needed topay the debt is impossible.Debt used to be an asset held by the lenders-now it is an unredeemable liability. The only thing which stopped Jeff’s $200/barrel prediction from coming true has been the speed with which the economies have perceived and reacted to the severe financial state they are in.Jeff, keep trying to shake people up. 

  • Unc

    Jeff,when in dou-dt,start a war,syria and then iran,that should get the m i ind complex rockin, wars are good for investment,seams to keep the meat hounds happy,when they aint happy,there is some economic pennance tp pay,for the common folk,the old addage  rings true,thems that got the gold,makes the rules. quite a system.Unc fsj

  • Anonymous

    GNP per capita worldwide in real terms is more than likely to halve over the next 10 years.
    There are no solutions to this, so it doesn’t matter who you vote for (they are all going to say they have the silver bullets) and the end results going to be the same. Doesn’t matter whether is a deflationary or hyperinflationary mess (though controlled deflation is probably a better approach) the end result is going to be everybody’s broke.
    Gold/Silver is only going to be worth what it can be traded for it’s not some form of magic, and as some of the big gold pundits have found (Gerald Celente) it’s only physical gold you have buried in some secret location that has any sort of safety (it’s still a high level of risk). Gold stored in banks or investment houses is only as good as the investment house. I wouldn’t trust any of them. People are going to steal and fight for the remaining scraps on the table.
    People are going to have to get use to much lower living standards, the first things to be affected are the travel and Auto sectors, they are at their end game now.
    Governments need to prepare and consult the people on how to manage the decline.

  • Anonymous

    Anybody think that after the election things are going to change, nothings changing.

  • Bueno

    It won’t be all that bleak by a long shot

  • Abitibi Doug

    Like Bueno, I also think that prediction is overly pessimistic. However, the idea of GNP for more developed countries being stagnant for many years is not out of the question. Whether governments will help people manage this stagnation remains to be seen. It’s more likely that in governments the different parties will argue with and blame each other so individuals, with the help of organizations like charities or financial advisors, will have to figure it out for themselves. 

  • rfk

    American Citizens on U.S. Soil May be Indefinitely Detained, Sent to Guantanamo or Assassinated

    American Citizens on U.S. Soil May be Indefinitely Detained, Sent to Guantanamo or AssassinatedU.S. Says Americans Are MILITARY Targets in the War on Terror … And Says that Only the White House – and Not the Courts – Gets to Decide Who Is a Legitimate TargetAs everyone realizes by now, Congress’ push for indefinite detention includes American citizens on American soil. As Huffington post notes:The debate also has left many Americans scratching their heads as to whether Congress is actually attempting to authorize the indefinite detention of Americans by the military without charges. But proponents — led by Sens. Lindsey Graham (R-S.C.), Kelly Ayotte (R-N.H.) and Carl Levin (D-Mich.), chairman of the Senate Armed Services Committee — say that is exactly what the war on terror requires. They argued that the bill simply codifies precedents set by the Supreme Court and removes uncertainty, which they said would better protect the country.Here is John McCain justifying sending Americans to Guantanamo:    And see this.(As Emptywheel and Glenn Greenwald note, the White House has believed for many years that it possessed the power to indefinitely detain Americans. See this, this, this, and this.)But that’s not all.The government can also kill American citizens. For more than a year and a half, the Obama administration has said it could target American citizens for assassination without any trial or due process.But now, as shown by the debates surrounding indefinite detention, the government is saying that America itself is a battlefield.AP notes today:U.S. citizens are legitimate military targets when they take up arms with al-Qaida, top national security lawyers in the Obama administration said Thursday.
    The government lawyers, CIA counsel Stephen Preston and Pentagon counsel Jeh Johnson … said U.S. citizens do not have immunity when they are at war with the United States.
    Johnson said only the executive branch, not the courts, is equipped to make military battlefield targeting decisions about who qualifies as an enemy.
    The courts in habeas cases, such as those involving whether a detainee should be released from the Guantanamo Bay detention facility in Cuba, make the determination of who can be considered an enemy combatant.You might assume – in a vacuum – that this might be okay (even though it trashes the Constitution, the separation of military and police actions, and the division between internal and external affairs).But it is dangerous in a climate where you can be labeled as or suspected of being a terrorist simply for questioning war, protesting anything, asking questions about pollution or about Wall Street shenanigans, supporting Ron Paul, being a libertarian, holding gold, or stocking up on more than 7 days of food. And see this.And it is problematic in a period in which FBI agents and CIA intelligence officials, constitutional law expert professor Jonathan Turley, Time Magazine, Keith Olbermann and the Washington Post have all said that U.S. government officials “were trying to create an atmosphere of fear in which the American people would give them more power”, and even former Secretary of Homeland Security – Tom Ridge – admitst hat he was pressured to raise terror alerts to help Bush win reelection.And it is counter-productive in an age when the government – instead of doing the things which could actually make us safer – are doing things which increase the risk of terrorism.And it is insane in a time of perpetual war. See this, this, this and this.And when the “War on Terror” in the Middle East and North Africa which is being used to justify the attack on Americans was planned long before 9/11.And when Jimmy Carter’s National Security Adviser told the Senate in 2007 that the war on terror is “a mythical historical narrative”. And 9/11 was entirely foreseeable, but wasn’t stopped.   Indeed, no one in Washington even wants to hear how 9/11 happened, even though that is necessary to stop future terrorist attacks.  And the military has bombed a bunch of oil-rich countries when it could have instead taken out Bin Laden years ago.As I noted in March:The government’s indefinite detention policy – stripped of it’s spin – is literally insane, and based on circular reasoning. Stripped of p.r., this is the actual policy:
    If you are an enemy combatant or a threat to national security, we will detain you indefinitely until the war is over
    It is a perpetual war, which will never be over
    Neither you or your lawyers have a right to see the evidence against you, nor to face your accusers
    But trust us, we know you are an enemy combatant and a threat to national security
    We may torture you (and try to cover up the fact that you were tortured), because you are an enemy combatant, and so basic rights of a prisoner guaranteed by the Geneva Convention don’t apply to you
    Since you admitted that you’re a bad guy (while trying to tell us whatever you think we want to hear to make the torture stop), it proves that we should hold you in indefinite detention
    See how that works?And – given that U.S. soldiers admit that if they accidentally kill innocent Iraqis and Afghanis, they then “drop” automatic weapons near their body so they can pretend they were militants – it is unlikely that the government would ever admit that an American citizen it assassinated was an innocent civilian who has nothing at all to do with terrorism.

  • Double-Breasted Suit

    What are your thoughts, Jeff, on the viability of the Internet in the future economy? I suspect that as fuel prices rise, home deliveries will rise too. Groceries and milk will be delivered again. Far less fuel is consumed in aggregate with trains making local milk runs and light trucks delivering it to homes than when it is trucked in from hundreds of miles away and driven the proverbial last mile by the consumer himself in his or her own light truck (SUV), which is the current model. Now the consumer can contact the milkman with a laptop and notify him when the household is out, instead of phoning in and having the list updated with paper and pencil. He can printout an updated list and top off his van before leaving for his route.

    In the old days, urban people went to department stores to buy clothes, while rural people went to a general store or shopped the Sears catalog, or made a semi-annual trip to the big city for shopping. Now they go to malls, while increasingly shopping online. Some might predict that the old model will come back with the end of cheap oil, but I’m not so sure. Why operate a large store with a large sales staff that has to be paid at least something whether sales are brisk or not? My former employer decided this was uneconomical and cut our sales force in half. I kind of saw this coming. My store was only busy when we were having an absurd 50% of sale, achieved by having ridiculous markups on our mostly Chinese-made goods. The rest of the time they were wasting electricity, space, and labor costs. Consumers weren’t really saving, they were wasting gas circling the parking lot in search of a parking spot, then over-paying for merchandise of often dubious quality. (There’s nothing wrong with buying a cheap suit if you’re not going to wear it very often — but you should realize what you’re getting and adjust your expectations accordingly, and you shouldn’t pay four times what it cost to make it and deliver it to the store. Whoever was getting the surplus, it certainly wasn’t me!)

    Why not warehouse the clothes near where they are produced, aggregate the Internet orders by district and ship them by rail to be distributed the last few miles by truck, or, in very dense areas, scooter or workbike? You wouldn’t be able to wait until the day of your wedding to buy a suit (yes, it occasionally happened), but your overall costs would be lower (you wouldn’t be hoodwinked into paying $240 for a $60 part-polyester rag of a suit from China — it would be more like $100),

    Fibre-optic networks require expensive initial inputs, but once in place, they are relatively cheap from an energy use standpoint and I think they can help us efficiently use the precious fuel that we will have left. They can also help consumers find niche products that their local retailer would never carry — it just won’t be realistic to have them FedExed overnight anymore.

  • Cmaumi

    Some very anti Gold comments. Disgruntled people who haven’t been stacking. As long there are people talking down physical gold, I’ll keep buying. Jeff, do you have any price targets for Gold. It would be interesting to know where you stand on both the black, and the yellow stuff.