This Time is Different

All financial crises are defaults in debt repayments. Nearly all of them start with government defaults.

Like all other debts, government debts come due and must be repaid; usually, with more debt, the government borrows money and pays the loan payment due; in the financial jargon, the obligations are ‘rolled over.’

Our governments are running up huge debts. The amounts are frightening, but we are calm. Unfortunately, this may be the calm before the storm.

Someday a government will want to ‘roll over’ its debt.

An anonymous bond trader will say to himself, “I don’t think that they can pay this money back; I need a higher interest rate to compensate for the higher risk.”

That trader will get an extra few basis points on his new loan.

Another trader will say, “that debt load was sustainable at last week’s lower rate, but with that higher rate, I don’t think they can pay this money back. I need a higher interest rate to compensate for the higher risk.” He will get an even higher rate.

In the twinkling of an eye, the 1% sustainable debt coupon rate becomes 3%, then 4% and higher, consuming more and more of the government’s budget.

Then another anonymous bond trader says, “no amount of interest will compensate for this level of risk.”
The day of reckoning has come. The country is bust; it cannot borrow anything. Civil servants are not paid, highway workers are not paid, in Canada, nurses and doctors are not paid, there is no cash.

And this phenomenon is more contagious than a Wuhan flu variant. All the countries will find they cannot refinance at the same time. As a result, we will have another financial crisis.

This time will not be different.

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