The Twelfth state of America’s Financial Endgame™ is the point where the government debt spiral finally reaches the point where the global financial community moves away from US Treasuries as the world’s safest investment. This is the critical juncture where reductions in bond prices turn into a bond price collapse. It is the point where a spike in interest rates becomes an explosion in interest rates. This is the watershed moment where America’s Financial Endgame™ morphs from a national economic problem into a global economic crisis that precipitates widespread social unrest.
The reason for this is because current government spending rates are predicated on the assumption that the capital markets can be harnessed at near-zero interest rates for an indefinite amount of borrowing to finance government spending. Since this is a situation that is clearly unsustainable, the ultimate fragility of current government policy will ultimately result in its collapse. This collapse is all but certain to be brought on by an initial rate spike from bond price weakness that increases the total annual government interest expense to the point where a perpetually growing debt spiral ensues. Once this point is reached, there is almost no turning back
The resulting crash in bond prices and surging yields will precipitate a voracious recession that is likely to become a national or possibly global depression. As the cost of borrowing increases for governments, businesses, and individuals, there will be massive de-leveraging. This contraction in spending will lead to massive losses in the financial markets, real estate markets, and broad debt markets. This will precipitate a broad swath of bankruptcies, foreclosures, and layoffs throughout the economy.
However, this time the government will not be able to swoop in with another round of bailouts and quantitative easing to paper over the problems. The reason for this is because the ability of the government to borrow will be significantly compromised by the collapse in bond prices, and broad inflation that has already precipitated a reduction in the money supply by the Federal Reserve. As each bond auction goes by, the government will have to offer its bonds at deeper and deeper discounts to find buyers. (In bond pricing, lower prices equate to higher yields since the full face value plus face rate of the bond must be paid, regardless of what purchase price is paid)
The inevitable situation that will result from all of this is a massive amount of financial investments, properties, businesses, and other assets that are available at extremely low prices relative to their underlying value. This “garage sale” of assets will result from the extensive de-leveraging that occurs as a result of the debt market collapse.
The problem that will engulf many people who are “fully invested” prior to the crash is that all of their financial assets will be de-valued, and they will have little capital available to capitalize on the buying opportunities that are available. There will be many high-quality assets that are available at prices previously believed to be ridiculously low.
The key to thriving in the upcoming financial crisis will be to survive the crisis with enough liquid capital intact to capitalize on the opportunities that are available after the debt market collapse unfolds. This will require a combination of insight, discipline, and patience on the part of investors to stay invested long enough to capture gains from the market expansions, reduce exposure as prices climb, and then to liquidate assets prior to the full collapse.