02-28-2020, 10:13 AM
** 28-Feb-2020 World View: Collapse of interconnected, interlocking debt
A chain reaction panic would not be caused by recent reckless
transactions or recent shorts. It would be caused by the unraveling
of hundreds of trillions of dollars of interlocking debt that has
been built up since the end of World War II, and people increasingly
ignored the lessons of the Great Depression.
![[Image: eng-december-26-global-debt-1.png]](https://blogs.imf.org/wp-content/uploads/2018/12/eng-december-26-global-debt-1.png)
That graph is a year old. Global debt has continued to increase
exponentially, and had reached $253 trillion by September, and is probably
around $260 trillion today.
-- Global debt hits new record of $253 trillion and is set to grow
even more this year
https://www.cnbc.com/2020/01/14/global-d...-says.html
(CNBC, 14-Jan-2020)
This debt has been growing exponentially for decades. In addition,
the number of interlocking connections has been growing exponentially.
(This is analogous to the interlocking, interconnected global supply
chains through China that are much in the news these days.)
So the chain reaction panic would be triggered by a major bankruptcy
in one company, which won't then be able to make payments on their
debts, and will sell off their assets, including stocks. Other
companies or hedge funds that counted on receiving those debt payments
would then be forced to sell stocks to pay their own debts, to
cover shorts, or meet margin calls.
The point is that this has nothing to do with recent transactions.
This has to do with an ocean of interlocking, interconnected debt
that has built up since WW II.
In 1929, it took for years for the interconnected debt to unravel
completely, and the market only reached bottom in 1933.
In 1987, ther was a "false panic" that fizzled quickly because there
was still a reasonable amount of interconnected debt.
In 2008, I wrote a lot about this interconnected debt situation,
especially after Bear Stearns and Lehman went backrupt. Normally, the
ocean of interlocking, interconnected debt is self-healing, but in
2008 it wasn't.
** Investors fear a 'chain reaction' in stock market.
** http://www.generationaldynamics.com/pg/x...m#e080317b
** Investors are having another nail-biting weekend as Lehman heads off the cliff
** http://www.generationaldynamics.com/pg/x...tm#e080913
The thing that I didn't understand in 2008 is that the Fed could
"print money" in massive amounts using quantitative easing.
The purpose of QE was specifically to allow people to borrow more
money instead of being forced to sell off.
So today we're facing the same situation we faced in 2008, but with
some differences. If you look at the IMF graph, it seems that debt in
the US has leveled off (at an extremely high), but has grown much
faster outside the United States. If a new panic begins, the Fed and
other central banks would try to "print money" to patch things up, but
with $260 trillion in global debt, that may not be possible.
Ordinarily I wouldn't be talking like this, but the world economy
is extremely fragile today because of the US-China trade talks, and
especially because of the world coronavirus crisis, which has already
resulted in millions of businesses in China going bankrupt. These
factors are an enormous shock to the body of interlocking,
interconnective debt that I described.
If we follow the same pattern as in 1929, then investors will spend
the weekend becoming increasingly worried, and be ready to sell first
thing Monday morning, resulting in a massive Black Monday selloff.
richard5za Wrote:> It may well be forced selling; it depends upon just how reckless
> the trading became; time will tell.
(02-28-2020, 12:25 AM)Warren Dew Wrote: > I don't see how covering shorts can cause a crash, even selling to
> cover shorts. Covering a short is a buy action, so you're buying
> as much as you're selling.
A chain reaction panic would not be caused by recent reckless
transactions or recent shorts. It would be caused by the unraveling
of hundreds of trillions of dollars of interlocking debt that has
been built up since the end of World War II, and people increasingly
ignored the lessons of the Great Depression.
- IMF graph of Global debt growth, 1950-2017
That graph is a year old. Global debt has continued to increase
exponentially, and had reached $253 trillion by September, and is probably
around $260 trillion today.
-- Global debt hits new record of $253 trillion and is set to grow
even more this year
https://www.cnbc.com/2020/01/14/global-d...-says.html
(CNBC, 14-Jan-2020)
This debt has been growing exponentially for decades. In addition,
the number of interlocking connections has been growing exponentially.
(This is analogous to the interlocking, interconnected global supply
chains through China that are much in the news these days.)
So the chain reaction panic would be triggered by a major bankruptcy
in one company, which won't then be able to make payments on their
debts, and will sell off their assets, including stocks. Other
companies or hedge funds that counted on receiving those debt payments
would then be forced to sell stocks to pay their own debts, to
cover shorts, or meet margin calls.
The point is that this has nothing to do with recent transactions.
This has to do with an ocean of interlocking, interconnected debt
that has built up since WW II.
In 1929, it took for years for the interconnected debt to unravel
completely, and the market only reached bottom in 1933.
In 1987, ther was a "false panic" that fizzled quickly because there
was still a reasonable amount of interconnected debt.
In 2008, I wrote a lot about this interconnected debt situation,
especially after Bear Stearns and Lehman went backrupt. Normally, the
ocean of interlocking, interconnected debt is self-healing, but in
2008 it wasn't.
** Investors fear a 'chain reaction' in stock market.
** http://www.generationaldynamics.com/pg/x...m#e080317b
** Investors are having another nail-biting weekend as Lehman heads off the cliff
** http://www.generationaldynamics.com/pg/x...tm#e080913
The thing that I didn't understand in 2008 is that the Fed could
"print money" in massive amounts using quantitative easing.
The purpose of QE was specifically to allow people to borrow more
money instead of being forced to sell off.
So today we're facing the same situation we faced in 2008, but with
some differences. If you look at the IMF graph, it seems that debt in
the US has leveled off (at an extremely high), but has grown much
faster outside the United States. If a new panic begins, the Fed and
other central banks would try to "print money" to patch things up, but
with $260 trillion in global debt, that may not be possible.
Ordinarily I wouldn't be talking like this, but the world economy
is extremely fragile today because of the US-China trade talks, and
especially because of the world coronavirus crisis, which has already
resulted in millions of businesses in China going bankrupt. These
factors are an enormous shock to the body of interlocking,
interconnective debt that I described.
If we follow the same pattern as in 1929, then investors will spend
the weekend becoming increasingly worried, and be ready to sell first
thing Monday morning, resulting in a massive Black Monday selloff.
