US Election, French Election and German Election
US election in countdown mode now. Most people including traders cannot help but focus on the potential outcomes of this election. But this election is just the first messed up election among G8. Whatever happens now and after the US election in the United States will likely be mirrored if not exceeded in terms of lunacy when the time comes for the France election by April to May in 2017. Both of these elections are just prelude though, as the most important election that will determine the fate of the European Union will be the Germany election later next year.
How is all these elections going to impact us all worldwide?
A Bad Example Is Now Set
I’ll just sum it up with a few words on the US presidential election so far – how low can both camps go?
Given the way the US election is handled, we can pretty much foreseen that the upcoming French election will probably go for similar tactics to win votes. Of course, rigging the counting process is a given. It will be no better with the German election as well. The truth is that all three countries have more than half of the population not happy with their governments.
In the past, the beautified elections led to short term peace of mind among the voters and bought these countries several years of political calmness. This time around, there is no more room for just beautification as lies were caught red handed in these countries. Crazy political agenda and corruptions also hurting people too much. Those people who has no political influence, meaning those not important in affecting the election outcomes, are abandoned for more than a decade now so no sweet talking or empty promises will make them happy.
Hence, whatever the outcomes are for these elections, the endgame is the same – civil unrest and start of the breakdown of the system.
Government Bonds Will Be In Big Trouble
One of the biggest issues among these governments are their spending sprees. Given the fact that these governments will likely be paralyzed thanks to impossibility for the opposite camps to cooperate, the fiscal budgets for these countries will be a mess. In other words, shaking the confidence of the investors as these governments no longer functioning in a way that a reasonable government entity should.
There is really no reason for any saint person to buy any government bonds given the interest rates for these instruments have been near zero. The only reason for people still buying them is that one can still argue that they are safer instruments in comparison to other vehicles. But we have seen how fast this can change. Last time Russian bond crisis in year 1998 pretty much wiped out all investors who put money there.
Majority of government bond buyers are the crowd who seek for safety. This means that many people who bought these bonds could be buying them just because of others saying so. Like pension plan fund allocations often automatically put part of the money into these bond funds. As the breakdown begins, the wipe out process will be swift with no mercy.
In short, once any one of these countries having trouble with their bond market, the rest will be affected and the selloff will not stop until majority of the holders are losing more than half of their money.
Destruction of Money
When these government bonds melt down, there is a ripple effect into all fabric of the economy. Bonds are usually used as collateral for financing all kinds of market activities and investments in businesses. The devaluation of these government bonds will affect the ability to borrow for many businesses. The destruction of money has its consequence. It is called deflation.
The spiral down effect of deflation will have to unfold slowly and painfully for many years to come.
Various central banks and governments will do all kinds of stupid things to stop deflation although they would simply adding fuel to the fire.
Here is a simple metaphor on the reason why interventions by the officials won’t work. When a cinema with one exit is on fire, chaos is ensured. And that holding guns at the people inside the cinema telling them not to panic will not stop them from doing what they are going to do. The likely outcome will just be killing those people because “they are not obeying the law”.
If you have retirement savings that you do not even know what kind of funds you have bought, maybe it is time to find out.
If you know that you have significant amount of savings put into various derivatives based on these government bonds, it is time to think about better diversification.
If you are seriously worry about the future of these bond markets, you may consider keeping cash around.
The more difficult question with this situation is where to park the money cashed out from bonds and bond funds. That is going to be a good topic for a separate article.
The Usual Disclaimer
I am not your financial advisor. This is my blog for which I am writing what I think and that is not financial advice of any kind. I am not responsible for your own trading or investing decisions.