THE FINANCIAL BUBBLE THAT CAUSED THE CRASH IN 2008 HAD A NEGATIVE YIELD OF $1.3 TRILLION
THE CURRENT BUBBLE IS 10 TIMES BIGGER
There’s an old saying that goes a little something like this, “If China sneezes America catches the flu and if America sneezes the whole world catches the flu”. Well in 2008 America sneezed when the housing market crashed and brought down the U.S economy and with it the rest of the world. And boy was it bad.
The effects of a financial bubble with a negative yield (‘Negative yield’ simply means that an investor who loans money to government will get back less money than she/he invested once the bond matures, In other words, the government is getting paid to borrow money.) of $1.3 trillion (R18.08 trillion) crashing caused many banks to shut down, as well as a loss of $3.4 trillion (R47.29 trillion) in real estate wealth, the average house hold lost about $30, 300 (R421, 459,36).
The U.S Stock market lost about $7.4 trillion (R102, 93 trillion) in stock wealth from ’08 tom’09, meaning more than 5 million Americans lost their jobs due to the slow economy, so what on earth is a financial crash with a negative yield of $13.4 trillion (R186, 39 trillion) going to do.
One of the chief culprits of this economic implosion was the collapse of the sub-prime bubble.
Banks had spent years making sweetheart home loans to just about anyone who wanted to borrow, including high risk ‘sub-prime’ borrowers who were often insolvent and had little prospect of honouring the terms of the loan.
When the bubble got into full swing, lending practices were so out of control that banks routinely offered no-money-down mortgages to subprime borrowers.
The deals got even sweeter, with banks making 102% and even 105% loans.
In other words, they would loan the entire purchase price of a home plus closing costs, and then kick in a little bit extra for the borrower to put in his/her pocket.
So basically these subprime home buyers were getting paid to borrow money and
Of course, we all know how that turned out. By 2008 the entire system crashed because bad things tend to happen when you pay people to borrow money, especially when they’re not particularly creditworthy.
So thank goodness these college educated men and women learned from their mistakes and wouldn’t be dumb enough to go that route again. Right? WRONG, today, subprime is back and there’s been a lot of talk lately about a growing bubble in the subprime auto loan market, and even student loans.
But the biggest subprime bubble of all however is the negative interest loans being made to sovereign governments all over the world.
Now there are governments all over the world issuing sovereign bonds with negative yields… and many of these governments are totally bankrupt.
Japan, with its debt level at more than 220% of GDP, is the latest entrant into the world of negative interest bonds.
Japan’s debt is so high, in fact, that it takes 41% of government tax revenue to service. Even in Italy, one of Europe’s most notoriously and hopelessly bankrupt countries, the government bonds have negative yields. Sounds familiar doesn’t it, only this time the government is the one getting paid to borrow money.
So it’s not much different than when banks paid subprime homeowners to borrow money ten years ago based on a misguided premise that home prices ALWAYS go up.
Now they’re just paying subprime governments to borrow based on a misguided premise that governments will ALWAYS pay. The key difference however between the 2008 crash and the one that’s currently pending is the size.
What makes this financial bubble even scarier than the last one is the rate at which it keeps growing. In January 2016, the total amount of government bonds in the world with negative interest totalled about $5.5 trillion (R74.64 trillion).
One month later in February the total had grown to $7 trillion (R95.03 trillion) By May it was $9.9 trillion (R134.4 trillion). And today it’s sitting at an all-time record high of $13.4 trillion (R186, 39 trillion).