A Reflection On Bonds & Total Government Debt

From Chart of the Day:

For some perspective on the European sovereign debt crisis, today's chart illustrates the forecasted 2012 debt to GDP ratio for each of the PIIGS (red bars) plus a handful of today's major economies (blue bars). While the PIIGS are currently enduring relatively high debt loads, it is noteworthy how some of the relatively safe nations/bond markets (e.g. United State and Germany) are not far behind. These relatively high debt loads are of concern as they could lead to higher taxes sometime in the future and can risk fiscal crises if bond holders sense an increasing risk of default. The current crisis in Europe provides a clear example of the bond market's reaction (i.e. higher bond yields) to increased default fears. This leads to a very interesting case study that is Japan. With a debt to GDP ratio of over 200%, the Japanese 10-year bond yield is a relatively low 0.83%. Why? At the moment, the bond market feels that the Japanese have the ability to repay their debts -- in part due to Japan's perceived ability to raise taxes. To that end, Japanese Prime Minister Yoshiko Noda just won opposition support for the doubling of the nation's sales tax to 10% by 2015. So it's not just the amount of debt but also convincing your banker that you are good for it.
 My view:

The debt situation amongst developed countries is almost unfathomably unsound.

The bond market to date has been very forgiving and understanding of government largess as developed countries continue to embark on a quest to boost their sagging economies and prop up a corrupt, insolvent banking sector.

Once the bond vigilantes become concerned with return of capital rather than return on capital, probably by the middle of next year, it is my contention that yields will rise rapidly and we will experience the popping of the bond bubble.

As previously examined on this blog, government debt that ventures past the 80 to 90% of GDP range ensnares an economy to zero growth and eventual sovereign default.

As the Eurozone bureaucrats continue to raise taxes, restrict capital flows, and extend and pretend with Greece, Spain, Portugal, and Italy, the day will come when the vigilantes say Enough! we want our money back.

Japan remains a wildcard in the global race to government default.  After 25 years of zero growth, the aging nation is now raising consumption taxes in a vain effort to keep the spending ship afloat.  While default is likely a few years away, we could see a surprise reaction from domestic debt holders who, seeing the negative effects of Fukushima and shoddy government efforts to contain the contamination, may vote with their Yen and dump Japanese bonds.

With these fundamentals, I remain bullish on precious metals for the longer run and the US dollar for the short run.


  1. PW,

    Looks like the sun is about to set everywhere, sooner or later. The establishment must be quacking in their collective shoes! What is the modern equivalent of the guillotine?



  2. I wonder if fiat currencies and government bonds are the financial equivalent of the guillotine? Nearly every citizen depends on the currency and has faith in it, they invest in stocks and bonds to fund their pensions and savings. When the day comes that bonds collapse, it could chop off many investor's heads.

    All the best,



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