fiscal cliffFinancial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st.  We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“.  In other words, it could be a “Lehman Brothers moment” for Asia.  And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well.  Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion.  That is an increase of $14 trillion in just a little bit more than 5 years.  Much of that “hot money” has flowed into stocks, bonds and real estate in the United States.
The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen.
Will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?
In the end, it doesn’t really matter.  The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.
It is just a matter of time.


 

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From The Economic Collapse Blog:

Never before has so much private debt been accumulated in such a short period of time.  All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads.  In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014.

Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money.  But the truth is that what has been happening in China surpasses all of their efforts combined.  You can see an incredible chart which graphically illustrates this point right here.  As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

As with all other things in the financial world, what goes up must eventually come down.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system.  The following is from a Reuters article

The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.

Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.

If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly.  A recent Forbes article explained why this is the case…

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China.  According to Forbes, M2 in China increased by 13.6 percent last year…

And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.

Overall, M2 in China is up by about 1000 percent since 1999.  That is absolutely insane.

And of course China is not the only place in the world where financial trouble signs are erupting.  Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.

If current trends continue, many other big banks will soon be experiencing a “bond headache” as well.  At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years.  Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.

But I am not the only one talking about it.

In fact, the World Economic Forum is warning about the exact same thing…

Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.

Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.

This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?

In the end, it doesn’t really matter.  The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.

It is just a matter of time.

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    • @Marchas45
       
      Sounds like the kind of timing that would appeal to these banksters and their elite leash-holders to me.  Only problem is that with all these derivatives hanging over us like the Sword of Damocles, nobody seems to want to call a default a default.  It’s like, if they use the “D” word, it actually happens but if they don’t use that word, they can fancy it up until no one really knows what happened… ergo, no default and no derivatives failure.  It is indeed a crazy world out there.  Makes me wanna dig a hole, crawl in, and pull it in after me.  X-[

  1. ” In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014.”
    Why the apples to pears here? Both economies are equal in overall size, but Chinese companies do not equal US govt.
    Note that the US govt is getting discounted interest rates also. They are the global suppressing power of interest rates. Do Chinese companies get the same sweetheart deal?

    • “Note that the US govt is getting discounted interest rates also.”
       
      Well and truly noted, XCS.  In fact, the US Gov REQUIRES these rates in order to sustain the whole house-of-cards system we have here.  If interest rates were at their 50 year average, they would be somewhere around 5.5-6%.  That’s almost enough to consume the entire US Gov income these days.  In order to continue the charade, interest rates MUST be kept at historic lows and by whatever means necessary.  This fact has not escaped their attention.  In fact, it probably scares the hell out of those in charge here on a daily basis.  Makes me wonder what lengths they are willing to go to in order to stop interest rates from rising much at all.
       

    • It’s not really a comparison but more about the scale. That is an insane amount of interest to be paid. If you want apples to apples….. compare it to the US during its boom growth years. It’s just another house of cards about to collapse that has been past due for years. 

      And for the record, yes chinese companies on average pay higher interest rates but that is because the government allows big banks to profit massively without rate reform b/c they make up 75% of the loan creation and happen to be mostly SOE.

  2. I can see it now, since China is ahead on world time, a bank holiday for a minor 72 hours(During the weekend), where cash is King.  When the banks reopen, there will be sticker shock on companies open.  Everything goes up? China will strangle hold the world as the BRICS countries foster their debt & death created by federal reserve.  Why?  Because there is nothing federal about a private bank that has no reserve.  Comments please?
     
     

  3. Dammit  Wifey’s got me set up for a mani-pedi Jan 31.  I am not changing that appointment.  And just one wise ass of this site gives me crap about mani-pedi gets a knuckle sandwich.
    My girl is a sweet vietnamese lady with really nice hands.  I will not miss it   Frig the Chinese and their debt I got my priorities

    • LMAO I went with my daughter and her partner when I was in California for her wedding when they had their nails and feet done also by Vietnamese girls, There was no way I was going to have it done so I just sat there and checked all the girls out. Because I’m A Man LMAO Keep Stacking

    • Real men can do WTF they want with no bullshit from anyone LOL.  I actually am a better cook, than my darlin’ wife, but if any one tells her I said that, then comes the Knuckle Sandwich…….LOL

    • @Denaliguide
       
      Hey, I hear ya on that, man.  My wife will tell people that I am a better cook than she is but I think that she is just trying to bribe me into cooking more so she can cook less.  I am a good cook, though… most chemists are.  lol
       

    • I see a lot of flying sandwiches on the way ha! …. Me? Pedicure? Hell, when my toe nails give me Hell, I bite them down and spit them on the carpet, and you know why? CAUSE I’M A REAL MAN! Hahahaha!

    • @Ed_B
       
      I end up with a lot of the cooking as well and concur with your thoughts.  I am not that bad at laundry either, but a shrunken sweater and the occasional bra in the dryer got me banned from that part of the household chores… oh well!

    • @mikeyj80
       
      “I am not that bad at laundry either, but a shrunken sweater and the occasional bra in the dryer got me banned from that part of the household chores… oh well!”
       
      Lol, same here!  Only in my case, it was a red blouse washed with some white items that then turned a lovely shade of washed out pink.  Good Lord!  Didn’t those clothing makers ever hear of using an oil-based color-fast dye?  My escape from laundry duty was short-lived, however, as days of rigorous training followed.  I can now do laundry with the best of them.  :-/
       

  4. Holy crap I just wonder where the 14 trillion dollars came from in the last 5 to 6 years. Why should it collapse there they have lots of money to loan. Unlike here the government is starving the economy an raking it over the coals with Obama care. I wonder to the timeline is correct its probably where our QE injection money went. Times 10 with the fractional reserve banking money compounded its in the trillions above an over 10 trillion. Comspiricy  theory there probably buying gold for the u.s. government?

    • Where did the money come from? Stupid American consumers who had to have the latest icrap device or the latest piece of plastic junk so they could be cool like their friends.

    • Yeah, their friends are just sooooo cool.  They are the ones in WVa who have jack for water or any other emergency preps because they spend all their money on useless crap items that others think are cool.  Those who worry more about what others think than of protecting themselves and their loved ones from disaster are morons, IMO.  iCrap?  Not in this lifetime.  Got too many preps to buy for wasting money on junk.  :-)
       

  5. A while ago I saw a report that in China they were offering a free Mercedes with the purchase of a luxury condominium.  Reminded of the days before the housing crash in the U.S. and I thought, “There’s your sign.”  Crash is imminent.

  6. The current reports on China are most confusing. Current growth 7.7%, business is booming? Now a huge 23 Trillion dollar debt bubble? What about the past articles stated here on The Doc? U.S.Bond market and stock market collapse immanent? Expect Dollar crash soon,etc, etc. The stuff getting around on this board is about as reliable as Obama.

    • An interesting interview with Jeff Berwick but I have to say that his thoughts on Bitcoin seem quite naive.  Government and bankster power RELY on their control of the monetary system.  There is no way in Hell that they are simply going to hand over that kind of power and control to this digital upstart.  Not gonna happen, no way, no how.  Remember, folks, this is the crowd that has presidents who wander off the reservation murdered… and they’re gonna sit still and take it up the rear end from Bitcoin?  HA!  Never gonna happen.
       

  7. Derivatives get damning verdict at Davos

    http://www.cnbc.com/id/101355282

     
    Financial derivatives – often seen as a big contributory factor to the global financial crisis — were the target of fierce condemnation at the World Economic Forum on Wednesday.
    The securities, which derive their value from the performance of another, were seen as a key reason why risk still remains in the global financial system. Paul Singer, CEO and co-chief investment officer at hedge fund Elliott Management, said that the leverage in the system – especially in derivatives – has to been meaningfully reduced.
    “I don’t believe (markets) are safer. I don’t believe they are safe,” Singer said at the panel discussion in Davos – chaired by Martin Wolf from the Financial Times.
    Wolf added that only relatively modest improvements in metrics did not mean that markets were any safer or immune from another crisis. He added that leverage, using these derivatives, was higher at some institutions that it was before 2008.

    • Derivatives are so leveraged that they allow a company, such as JP Morgan Chase Bank to wager 200-300 times more money than their entire net worth.  Whiskey Tango Foxtrot?  How is such a wager even allowed?  If less than 1/2 of 1% of those derivatives blow up and go unpaid, JPM is bankrupt.  This is like making a bet on a basketball game for $1000 and if you lose they take your house.  If you win, you get the $1000.  Anyone who would make such a wager should be banned from running ANY business bigger than a hot dog stand or coffee kiosk for life because they clearly do not have the sense necessary to do it correctly.

    • Ed, many derivatives are mark to market so any losses are trued up every night, therefore the risk never gets to the 200-300 level you mention.  This has worked well for many years, and even MF who tried to steal this true up money couldn’t quite get it done as customers have been returned 94+ percent of money and are going to get it all back last i checked.
       
      There are some peer to peer derivatives where that MTM does not happen daily, but every OTC that I have seen has a threshold at which a true up occurs (i.e. we’ll not send each other money unless the position is out of balance by 5mln, then we’ll true up).

      If you choose to enter a long term OTC transaction with a peer and choose to not have a mark to market or true up, you better know that counterpart really really well!

    • Yes, it IS easier because most people go immediately into denial after making a poor choice.  They seek to place the blame for their own poor choices on others but in their heart of hearts, they KNOW that the real fool is that person looking out of the mirror at them.

  8. Do you really think a black swan is gonna be announced????fear mongering.They will solve the problem!!!Did they announce the reserve primary fund breaking the buck??????NO….What is it fear ,conflict,resolution????SWINE FLU,BIRD FLU,ECT.,ECT.ECT.ECT.Your playing into the DAVOS agents hand…WAKE UP!!! USA is largest debtor nation in the WORLD and retains petro/reserve currency hegemony??!!China largest creditor nation in world…SERIOUSLY??!!!Its a false flag…get peoples minds off scandal in currency and metals market of WESTERN WORLD.Germany repatriation with lack of physical promised and what was received was RECASTED???Talk about that.Thailand,Ukraine,Egypt…uprising…SYRIA/Il queda,Saudi arabia and china and russia…….buddies….israel???who loves them???Enough I cant take talking about reality wen mockingbird elites feeding you BS and you giving it air time…PEACE

    • Your right…. None of it is real. Not even your life…. But acknowledging that is scandalous, you need deeper perception. In truth, I suggest any man look asfter his own, only to the extent he may, without disturbing his happiness…. The rest will happen with or without your knowing. The world is too big with too many evil men trying to capitalize on others through crime. Let it wash over you my friend, give it little time in your spirit or you will lose your sanity trying to monitor it all. Why do you think those in charge are insane? It’s all too much for men to digest. The simple solution is to own staple reserves in metal, food and protection be ause it is the entire solution for all of the possible woes that may or may not befall you and yours.  

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