It is rather simple. You can live in debt as long as someone wants to finance it. When you can make payments on a debt, even a massive one, you can continue the party. When you can no longer make payments, it becomes the problem of the lender, who must scramble to recoup the investment.
The smart lender pulls back from risk and starts charging higher interest. Unless bad habits change, the lenders will soon stop issuing loans to risky clients altogether.
Pulling Back From Debt
This is the problem of the West today. Low or even near-zero-interest loans led nations to become addicted to borrowing amply. After all, liberals argued, the use of the money was free. Such funds could finance all their utopian dreams at minimal costs.
Order Today: Return to Order: From a Frenzied Economy to an Organic Christian Society—Where We’ve Been, How We Got Here, and Where We Need to Go
However, pre-COVID economics have returned with a vengeance. Interest rates are up, yet nations, like junkies, continue to spend at record levels. The debt-to-GNP ratios of many developed nations are well over 100 percent, and the spending spree shows no sign of receding.
Like prudent lenders, treasury bond buyers are pulling back. A dangerous situation is developing since the world, especially America, now runs on treasuries.
Limp Demand
Government bonds are the ultimate safe investment. Investors looking for places to park large chunks of cash can purchase these guaranteed investment opportunities. The return is low, but security compensates for it. Governments likewise invest in these funds as part of their portfolios.
However, financial observers note that debt-heavy nations are finding limp demand for their bonds. In today’s interconnected markets, this trend could easily spread and cause a loss of faith in any of the West’s many debt-dependent governments.
Japan’s Plight: Massive Debt, Increased Spending
A perfect example of bond volatility is Japan, the world’s third-largest economy. For years, this nation’s government spent recklessly and accumulated huge annual deficits. Japan’s debt-to-GDP ratio now stands at 235 percent with no signs of abating. As a nation in a demographic meltdown, it will be difficult to pay this debt off in the future.
Why America Must Reject Isolationism and Its Dangers
In a routine auction of twenty-year notes in May, the Japanese government was shocked into reality when it found it difficult to unload its offerings. Bond market investors then forced interest rates up to their highest in decades.
Japanese Prime Minister Shigeru Ishiba likened Japan’s situation to that of Greece, which was at the epicenter of the 2009 Eurozone financial crisis and caused great upheaval in the European Union.
Despite a massive deficit, the Japanese government has taken an optimistic attitude toward issuing bonds and increasing its liabilities. Japan’s bond market is artificially kept afloat by the Bank of Japan, which buys a good portion of available bonds monthly. It holds roughly half of all outstanding bonds and has accumulated holdings greater than Japan’s GDP.
Economists are calling for cutbacks in the BOJ’s acquisition of bonds. A small cutback was approved, which led to the recent difficulty of finding investors to fill the gap and the higher interest rates they demanded.
A Warning to the World
Many bond watchers see the Japanese bond trend as a canary-in-the-mine warning to other heavily indebted nations. The reluctance to buy in the East could easily spread to the West in countries like the United Kingdom and the United States.
Help Remove Jesus Bath Mat on Amazon
Bond rates are based on trust in the country issuing them. When the financial books are in order, bondholders will accept a lower interest in exchange for an assured return. Long-term treasuries, ranging from ten to forty years, at low interest rates indicate that the nation has the stability to attract investors seeking safety for their cash over time.
Kicking the Can Down the Road
All these factors are interconnected and have consequences. The pre-COVID era of zero-interest loans is over. The new bonds come with a hefty price tag that makes deficit spending prohibitive.
However, governments show little indication of reducing their expenses and only take on more as they kick the can down the road.
America’s debt-to-GDP ratio now stands at 123 percent. The dim outlook for the future led Moody’s credit agency to downgrade American treasuries, which carried its highest rating.
Reflecting on a Moral Problem
What is missing from the scenario is order and stability. Markets thrive when these factors are in place. They give reassurance and predictability to the business world.
Satanic Christ Porn-blasphemy at Walmart — Sign Petition
Accumulating debt with no prospect of diminishing sends the signal that borrowers want to live only for the present. The financial instability of the trade and tariff wars also adds elements of uncertainty to markets, raising risks and making them jittery.
The debt crisis reflects a greater moral crisis inside society. The frenetic intemperance of countless people leads them to desire the gratification of their passions and whims regardless of the consequences. They put off dealing with the consequences to keep the party going. The day is coming when the party will be over.
Photo Credit: © zimmytws – stock.adobe.com