In a recent interview with Chuck Butler, he warned us that we may be in for a significant “Minsky Moment”.
The federal reserve is raising interest rates and unloading trillions in their US debt holdings. Countries that normally buy our bonds are slowing down their purchases or reducing their holdings. With fewer buyers, what happens if interest rates continue to climb?
Chuck then sent me an article by David Stockman which concerns me; the issues we discussed are happening worldwide.
David Stockman presented an eye-popping graph. Debt being held by central banks has tripled in ten years to well over $20 trillion.
If world-wide central banks are working in unison unloading debt – the Minsky Moment could be much bigger than I originally imagined.
It’s time to get some input from someone outside the US who is involved in global finance on a daily basis. I contacted Rob Vrijhof, President and Senior Partner in Weber Hartmann Vrijhof & Partners Ltd. located in Zurich, Switzerland.
DENNIS: Rob, thanks for taking the time for our education. Several experts are warning about the world-wide, staggering government debt. Central banks have reversed course – some have stopped buying, while others are selling off some of their holdings.
What are you seeing in Europe, China, Japan and elsewhere?
ROB: Thanks for inviting me.
The debt that has been building up by the world national banks is indeed staggering.
After the real estate bubble burst in the USA, enormous amounts of money created out of thin air were being pushed into the system trying to avoid a complete collapse of world economies. It seems that national banks, working in tandem, saved us from a total downfall – with interest rates falling into negative territory in Europe.
Reality is now kicking in and these enormous accumulated debts will eventually have to be paid back. The big question is how this will be done. This question is faced not only by the USA but also by Europe and Japan to name just a few.
This presents a real challenge for central banks for the years ahead. Higher interest rates are poison – perhaps it could be done through inflation.
Unfortunately, we strongly believe there will be no happy end to this party of cheap money.
DENNIS: The law of supply and demand hasn’t been repealed. When supply of debt instruments (bonds) is higher than demand, interest rates will rise. Interest rates on US treasuries have already doubled since July 2016.
