The credit markets are signaling that the debt fueled expansion that began in 2010 is turning to bust. This is the most precarious moment in financial market history because as the world slides into recession global central banks have no ability to soften the oncoming recession with debt creation. Globally interest rates are close to zero and even negative in Europe and Japan. Long term government bond yields are also extremely low. This is sending a very clear and ominous signal that the world cannot service more debt and in fact needs to deleverage and get on more solid financial footing.

The last time the world deleveraged was during The Great Depression. The defining quality of The Great Depression was the destructive deflation that gripped the economy. Deflation destroys financial asset values like stocks and corporate bonds and hard assets like real estate. It also lowers incomes while making debt more expensive to service as debt to income ratios rise. The world economy is on the precipice of another Great Depression.

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