There’s been a lot of news this week, but the headline that stands out more to me than any other, including Barack Obama’s announcement that he wants to restrain America’s use of nuclear weapons, is the Bank of International Settlements’s (BIS) warning that a sovereign debt crisis is nearing its “boiling point” across the globe. The BIS identified the U.S., Great Britain, Japan, and most countries in the Eurozone as countries that are in trouble.
The BIS’s warning should be taken seriously because they have a lot of clout. The BIS is the central bank of central banks (they are above the U.S. Federal Reserve in some respects for example). The BIS works with central banks and helps facilitate cooperation between central banks. The BIS’s announcement serves as an alert to central banks across the globe that there are major problems coming in sovereign (government) debt. If the BIS is concerned about a sovereign debt crisis nearing its boiling point ordinary people should be concerned as well.
Countries are at risk of experiencing a sovereign debt crisis when their debt obligations become burdensome. A sovereign debt crisis develops when investors actually become worried about a country’s ability to pay back its debt obligations without either resulting to devaluing its currency, defaulting on its debt, or seeking a bailout from an international institution like the Intentional Monetary Fund (IMF).
- I wrote an article about early signs of trouble in the U.S. government bond market over a week ago because I agree with the BIS that we could easily see a major sovereign debt crisis in the U.S. The problem that the U.S. Treasury had in selling U.S. government debt over a week ago was an early indication that a major sovereign debt crisis could be approaching soon for the U.S.
A sovereign debt crisis negatively impacts a country with rapidly rising interest rates and a lack of confidence in that country’s currency. For instance, interest rates on Greek government debt soared this week as bond investors became increasingly skeptical about Greece’s ability to make short-term payments without either needing a bailout by the EU/IMF or defaulting on some of its debt. Since Greece’s does not have its own national currency, currency traders have been punishing the Euro since the crisis in Greece began. The Euro is now at an all time low against the value of gold.
- The BIS is worried that a wide-scale sovereign debt crisis could result in inflation.
Some countries like Britain have been urged by the BIS to significantly reduce government spending to help reduce ballooning debts. The leaders of many countries are reluctant to reduce government spending significantly because cutting back on government spending poses a major political problem. The political problem with reducing government spending is that a lot of people end up getting laid off in the process. Large groups of angry unemployed people pose big problems for politicians because they usually demand that something be done about their situation or the politicians will end up joining them amongst the ranks of the unemployed. Political leaders are then left with the tough choice of undermining their attempt to reduce spending by spending money to help the unemployed or risk being thrown out of office.
- Greece’s sovereign debt crisis is rapidly approaching its end game where Greece will have no choice but to seek a joint-bailout from the EU and the IMF. The bailout is going to be humiliating for Greece and is going to result in a huge loss of economic sovereignty for Greece. Despite the desperate situation and the prospects of humiliation, the Greek government failed to reduce its spending like it should have because it faced fierce protests from powerful unions who actually tried to storm Parliament (the video is from Early March, but it shows a taste of the protests).
Governments across the globe have received credit from pundits for saving the global economy by bailing out certain companies and by engaging in large amounts spending. However, the bailouts and government spending across the globe actually made the situation worse because the risk of collapse has spread from the private sector to the public sector of the global economy. Instead of having a few companies fail, we now have a situation where the debts of governments have become so large that entire economies could collapse from rapidly rising interest rates, devaluing currencies, and inflation.
Economic collapse is going to lead to political collapse. Political and economic collapse will eventually lead to the next world war. Most people are unaware that we are facing such a crisis, but they will become aware of it sooner rather than later.
