Pension, Bonds, Interest rates, Banks, Inflation, Deflation, Bankruptcies, Derivatives, and the Supreme Court. An attempt at perspective.
Taken one by one, perfectly understandable. Putting them all together, a little more difficult. It has to do with debt, and overly simplistic, "kicking the can down the road"
Starting off with a current example:
Chicago, similar to Detroit, has an enormous debt, and like Detroit, has much to do with borrowing for city projects of all kinds. When you have a poor credit rating, it costs more to borrow, and issuing bonds can mean higher interest rates. Typically, over the past decade, these bonds carried variable interest rates... always adding to the long term debt. As the payments came due, one of the ways of paying these rates was to combine the many contract payments into one lower payment, by taking our higher risk loans... with potentially lower rates... in high risk derivatives. For many years, the derivatives have been hugely profitable... but variable. As the derivative settlement dates came closer, the risk was (supposedly) lowered by creating "swaps" where the trades were engineered between the tradiing parties... including the banks, and investment groups. This had the same effect as in the italics, above.
The initial bonds owed by the cities to the banks... still exist. The basic debt still exists. Eventually, the interest payments become so high, that the city can only make the payments by borrowing... Now by much much higher rate. Even paying the interst rates only, becomes difficult if not impossible. When the city defaults on the loan, the bank can call the entire amount due to be paid immediately. When this happens, the city can be driven to bankruptcy.
Now, with a few twists... replace "city" with "pension", and their long term obligations. Unfunded liabilities. Long term payout requirements exceeding the ability of the "fund" to pay out to later retirees. As these funds were hit with lower returns, when interest rates dropped, the natural response by the boards of directors was to look for higher paying investments. The led to more trading in derivatives... and so the cycle continues. Higher rates being reduced as swaps spread out the risk. Swaps eventually to have "due date".
Next... using the same sequence... switch to government debt.
Unfunded liabilities 96 Trillion.
Total current debt 61 trillion
Current interest 2.5 trillion
None of this makes sense (on a national basis) as the world economy is becoming less stable. Looking closely at the recent concerns about negative interest rates, it comes down to the trust in the value of the individual country's ability to back it's currency. Now... taking this to the next step, when the value of a national currency... ie. lira, dollar, pound, euro, rupee, franc etc... comes into question, there is a rush to banks, to withdraw savings etc, in cash... One way to reduce that risk, is to require monies or the equivalent to be kept "safe" at a cost... thus the negative interest rates.
The greatest fear for many people is for the derivatives market to be at risk.
12+ trillion in cash value, 700+ trillion in notional value, tied to contracts of 1.2+ quadrillion. Numbers that make the eyes glaze over.
Supreme courts in many states are considering pension rules, while several times removed from the direct subject of connectivity, will be ruling of pension guarantees. Chicago will certainly be involved. Look for some of the state cases to utimately end up with the U.S. Supreme Court.
...................................................................................
This is just my take on the way all of these issues are ultimately connected.
The time-line is another factor. Almost all of these different factors have been on the table for 10 to 20 years, with prophets of doom predicting global disaster to be eminent in a few days or weeks during those decades.
On a personal note, I seriously doubt that any of this will affect me, but thinking longer term, for younger persons... that understanding the economy in a multidimensional setting could lead to better, safer choices in personal finance.
As always..YMMV.
Taken one by one, perfectly understandable. Putting them all together, a little more difficult. It has to do with debt, and overly simplistic, "kicking the can down the road"
Starting off with a current example:
Chicago, similar to Detroit, has an enormous debt, and like Detroit, has much to do with borrowing for city projects of all kinds. When you have a poor credit rating, it costs more to borrow, and issuing bonds can mean higher interest rates. Typically, over the past decade, these bonds carried variable interest rates... always adding to the long term debt. As the payments came due, one of the ways of paying these rates was to combine the many contract payments into one lower payment, by taking our higher risk loans... with potentially lower rates... in high risk derivatives. For many years, the derivatives have been hugely profitable... but variable. As the derivative settlement dates came closer, the risk was (supposedly) lowered by creating "swaps" where the trades were engineered between the tradiing parties... including the banks, and investment groups. This had the same effect as in the italics, above.
The initial bonds owed by the cities to the banks... still exist. The basic debt still exists. Eventually, the interest payments become so high, that the city can only make the payments by borrowing... Now by much much higher rate. Even paying the interst rates only, becomes difficult if not impossible. When the city defaults on the loan, the bank can call the entire amount due to be paid immediately. When this happens, the city can be driven to bankruptcy.
Now, with a few twists... replace "city" with "pension", and their long term obligations. Unfunded liabilities. Long term payout requirements exceeding the ability of the "fund" to pay out to later retirees. As these funds were hit with lower returns, when interest rates dropped, the natural response by the boards of directors was to look for higher paying investments. The led to more trading in derivatives... and so the cycle continues. Higher rates being reduced as swaps spread out the risk. Swaps eventually to have "due date".
Next... using the same sequence... switch to government debt.
Unfunded liabilities 96 Trillion.
Total current debt 61 trillion
Current interest 2.5 trillion
None of this makes sense (on a national basis) as the world economy is becoming less stable. Looking closely at the recent concerns about negative interest rates, it comes down to the trust in the value of the individual country's ability to back it's currency. Now... taking this to the next step, when the value of a national currency... ie. lira, dollar, pound, euro, rupee, franc etc... comes into question, there is a rush to banks, to withdraw savings etc, in cash... One way to reduce that risk, is to require monies or the equivalent to be kept "safe" at a cost... thus the negative interest rates.
The greatest fear for many people is for the derivatives market to be at risk.
12+ trillion in cash value, 700+ trillion in notional value, tied to contracts of 1.2+ quadrillion. Numbers that make the eyes glaze over.
Supreme courts in many states are considering pension rules, while several times removed from the direct subject of connectivity, will be ruling of pension guarantees. Chicago will certainly be involved. Look for some of the state cases to utimately end up with the U.S. Supreme Court.
...................................................................................
This is just my take on the way all of these issues are ultimately connected.
The time-line is another factor. Almost all of these different factors have been on the table for 10 to 20 years, with prophets of doom predicting global disaster to be eminent in a few days or weeks during those decades.
On a personal note, I seriously doubt that any of this will affect me, but thinking longer term, for younger persons... that understanding the economy in a multidimensional setting could lead to better, safer choices in personal finance.
As always..YMMV.
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