The Financial System Is Breaking Down At An Unimaginable Pace
Now it’s $13 trillion.
That’s the total amount of government bonds in the world that have negative yields, according to calculations published last week by Bank of America Merrill Lynch.
Given that there were almost zero negative-yielding bonds just two years ago, the rise to $13 trillion is incredible.
In February 2015, the total amount of negative-yielding debt in the world was ‘only’ $3.6 trillion.
A year later in February 2016 it had nearly doubled to $7 trillion.
Now, just five months later, it has nearly doubled again to $13 trillion, up from $11.7 trillion just over two weeks ago.
Think about that: the total sum of negative-yielding debt in the world has increased in the last sixteen days alone by an amount that’s larger than the entire GDP of Russia.
Just like subprime mortgage bonds from ten years ago, these bonds are also toxic securities, since many of are issued by bankrupt governments (like Japan).
Instead of paying subprime home buyers to borrow money, investors are now paying subprime governments.
And just like the build-up to the 2008 subprime crisis, investors are snapping up today’s subprime bonds with frightening enthusiasm.
We’ll probably see $15 trillion, then $20 trillion, worth of negative-yielding subprime government debt within the next few months.
So this trend will continue to grow for now, until, just like in 2008, the bubble bursts in cataclysmic fashion.
It took several years for the first subprime bubble to pop. This one may take even longer. But even still, we can already see the consequences today.
A few months ago I told you about the remarkable $3.4 trillion funding gap in the US pension system.
Remember, we’re not talking about Social Security– that has its own $40+ trillion shortfall.
I’m talking about private companies’ retirement pensions, or public service worker pensions at the city and state level.
(By the way, this is NOT strictly a US phenomenon. Europe suffers its own $2 trillion pension shortfall.)
There’s zero mathematical probability that these pensions will be able to meet their obligations.
They’re already underfunded. And the problem is getting worse, thanks in part to this plague of low and negative interest rates.
You see, most pension funds must achieve a low-risk investment return of roughly 8% in order to stay solvent and pay their beneficiaries.
And making an 8% return used to be a reasonable assumption.
25-years ago, government bonds often yielded more than 8%.
So unsurprisingly, the average return for pension funds over the last 25-years has been around 8% according to the National Association of State Retirement Administrators.
But that’s no longer the case.
With such a huge portion of the bond market now with negative yields, it’s virtually impossible for pension funds to keep their promises.
Even Warren Buffett has written that “[pension] funding is woefully inadequate,” and, “In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep.”
Bottom line: anyone who is ever considering retirement must heavily discount the future promises of unfunded pensions and Social Security.
The younger you are, the less likely you are to receive benefits they’ve promised.
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