BREAKING: The Bond Market Is Collapsing (JPMorgan’s Final Warning)

our interest payments are higher than our defense department budget. If if we didn't do something about this, uh then there won't be any money for anything. So what if the safest, most stable investment in the world, the foundation of pensions, retirement accounts, and entire countries is starting to break.

But the longer term is still uncertain and the market response to the back and forth has been volatile, especially when it comes to the bond market. You are going to see a crack in the bond market. Okay?

It is going to happen. And I tell this to my regulators, some of who in this room, I'm telling you, it's going to happen and you're going to panic. Now, that was Jamie Diamond, the CEO of JP Morgan Chase, which manages about $4 trillion in assets.

and he put out one of his most serious warnings. And he's not alone. We're already seeing huge cracks overseas.

In Japan, the 30-year government bond has erased about half of its value since 2019, going down by about 45%. Just in the past year alone, the interest rates went up by 100 basis points, causing unrealized losses for Japan's biggest life insurers. Now, in the United States, we have over $36 trillion in debt, a debt to GDP ratio of about 124% and yearly deficits pushing above 6%.

Now, for context, that is more than double the 3% level economists usually say is sustainable for a healthy economy. And if Japan, which was once the center of global financial stability, the country that lends its money to all other countries, is flashing warning signs, and JP Morgan is sounding the alarm here at home, I think it's worth paying attention to because if the bond market really starts to crack, it could threaten way more than just your investments. It might unravel the entire global financial system.

Today, I'll break down exactly what's happening behind the scenes, why this is so important, what it means for our money, our future, and how I'm personally investing. So, with that said, let's get into it. Hi, my name is Andre Jick.

Hope you're doing well. Come for the finance and stay for the drama. So, in today's video, you're probably going to learn more about economics than any of my other videos.

But before we get into the juicy stuff of the drama between Elon Musk and President Trump and Jaime Diamond's warning and everything in between, first you have to understand exactly what's happening in the United States because all of this integrates directly with the federal deficit, the national debt, and at the center of all of this is the bond market. Now, that will explain everything that's happening right now. But first, let me just explain something important.

Whenever you hear finance nerds talk about yields or interest rates, they're basically saying the same thing. The yield on a bond is just the return or interest rate that you get from loaning your money to the government or a company. And when bond prices drop, their yields or interest rates go up and vice versa.

But here's the problem. Today, these interest rates are going up at a historic pace. In fact, the yield on what's called the 10-year Treasury bond, which is sort of used as the benchmark to determine interest rates, went up from less than 1% in 2020 to almost 5% today.

Now, to put that into perspective, that's the fastest jump that we've seen in the last 40 years. And it's creating a huge pressure on banks, governments, and financial institutions. But the question is, why are those rates going up?

That's the opposite of what we want, right? And here's why. When investors start to doubt a country's ability to pay back our interest, they demand higher yields to compensate for taking on that additional risk.

For example, if you were going to let someone borrow your money and maybe you're not 100% sure they were going to pay you back, you'd probably want just a little bit of extra for taking on that risk. That's why rising yields or rates are a lot of times seen as the first warning sign of trouble ahead. And unfortunately, the interest rates right now in the US are going up.

Not just in Japan, but also here at home. Now, to fully understand exactly how we got here though, I want to share with you an incredible presentation by economist Lynn Alden. She also put out a book called Broken Money, which by the way, I strongly recommend if you're a finance nerd.

Link is down below. But Lyn Alden described exactly why we're trapped in this cycle of rising debt. Let me walk you through each piece of a research step by step.

Because once you see it, your mind is going to be blown away. Now, the first piece of Lenaldin's research I want to show you helps explain exactly how we got stuck here and why this situation seems impossible to fix. Take a look at this chart.

On one side, you have the unemployment rate in red and on the other, government deficits in blue, which is how much more money the government spends than it collects through taxes each year. Now, normally these two lines move together in really predictable cycles. When the economy is strong and unemployment slow and people have jobs, governments collect more taxes and they spend less money, so deficits shrink.

Then during recessions, the opposite happens. When people lose their jobs, deficits go up as governments step in to support the economy. But notice something strange that started to happen around 2017.

Even as unemployment rates went down to historically low levels. The deficit started going up much faster. In fact, today our yearly deficit is around 6% of GDP.

Again, that's double the level that economists usually consider healthy. And that's not good. It's like the government's spending money as if we were in the middle of a recession, even though the jobs numbers say that the economy is really strong.

And that means we're borrowing at a pace that's normally reserved for economic emergencies. And here's why that matters. The more money we borrow, the more bonds we have to create and the more the debt piles up over time.

That makes investors very nervous. And when investors get nervous, as we talked about earlier, the interest rates start to go up. When rates go up, the value of the bonds go down.

That's sort of the trap that we're in right now. We're borrowing really heavily, even in good times, which sets us up for some serious trouble as soon as investors lose that confidence. Now, let's look at the next slide, which shows another really important piece of this puzzle.

Now, in this chart, it's comparing that real interest rate to the price of gold. Real interest rates are measured by the interest rate you earn on a bond, typically the 10-year Treasury bond, minus something called the CPI, the consumer price index, which is how economists measure inflation or the rate of growing prices. So, real interest rates again are 10-year bond rates minus inflation.

Now, historically, when real interest rates are high, investors want to buy bonds because you can comfortably earn interest above inflation, keeping the purchasing power of your dollar. But when real interest rates go down to almost zero or even negative, investors start looking for better places to put their money. Now, for decades, gold prices moved almost exactly in line with real interest rates.

But look at what's happened recently between 2022 and 2023. The two decoupled. Gold prices are now moving in the opposite direction of real interest rates.

Why? Because people are not rushing back to bonds right now. Instead, they're shifting their investment strategy toward scarce assets that can't be printed or devalued.

And this suggests that investors all over the world are starting to doubt the sustainability of the current financial system which is built on everinccreasing debt. Now the third slide from Lyn Alden's research shows something that's really interesting. This chart compares two types of debt growth.

Private debt, that's the blue line, which is money borrowed by businesses and everyday people like you and me, and public debt, which is the red line, which is money that's borrowed by the government. Now, throughout history, private debt has usually grown faster than government debt, except during recessions, which is when governments step in to borrow and stimulate the economy. So, that makes sense.

But something big changed after the 2008 financial crisis. Government debt growth started consistently outpacing private debt, even during economic expansions or times of growth. So even though we're not technically in any crisis, our government is borrowing money like we are.

And that's why investors are worried. And here's why that's a major major problem. The more governments borrow, the more bonds they issue.

But who's going to keep buying all these new bonds? Especially when debt levels are already so high. At some point, investors start doubting whether all of this borrowing can really be repaid without borrowing more money.

It's a catch 22. Now, I just want to take a step back and say that right now, we're in a new cycle where everything changes really fast. So, understanding the trends matters more than ever.

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Huge thanks to Mumu for supporting the channel. And now, let's get back to it. Now, Lyn Alden's fourth slide is maybe one of the most eyeopening ones because it brings all of this together in a simple visual.

Take a look at this chart in red. You're going to see the US federal debt to GDP ratio, which measures how much debt the government has in relation to the size of the entire economy. And in blue, you have interest rates, which are based on the 10-year Treasury bond rate.

Now, here's what's crazy, though. Back in the 1980s, US government debt was pretty small, only about 30% of GDP, but interest rates were very high, well into the double digits. But since then, we've been on this decadesl long trend where every year debt levels have gone higher and higher while interest rates have gradually come down lower and lower.

And what this has done is it's made borrowing feel more manageable. Sure, we borrow more money, but lower interest rates means that we pay less to service all that debt. So, it kind of equals out.

But now, we've hit this crucial turning point. Interest rates can't go that much lower. And lately they've actually started going up again.

Remember investors demanding higher interest for higher risk because our debt is at the highest level it's been since World War II. Now we currently owe over 120% of everything the US economy makes in a year. And that's a huge problem because now when interest rates go up just a little bit, our government has to spend so much more money just to pay the interest on the existing debt.

And I know that sounds really confusing, but I like to compare it to sort of how the older generation criticizes the young generation. It's like, well, back in my day, I was able to buy myself a house and I paid 15% interest because I could afford it and I worked really hard. It's like, no, grandpa, you could afford it because houses cost two raspberries.

But when houses cost a fortune, even 6% is incredibly unaffordable. That's essentially what we have right now, except on a national level. Sure, the rates are relatively low to where they were in the 80s, but our mortgage amount, aka our debt, has never been higher.

So, we can't sustain these higher rates. And that's why Jamie Diamond's pointing out that if the bond market starts to crack under this pressure, we're going to be in a lot of trouble. Now, this next slide from Lyn Alden's research ties directly into why our government keeps borrowing so much money.

This chart right here is the Social Security trust fund, which shows us how much money the government has set aside to pay for future retirement benefits. And you can see that it started from basically zero in the 1980s and it grew steadily for decades. And then it peaked sometime around 2017 at about $3 trillion.

But now it's dropping really fast and it's expected to hit zero within the next decade or so. Why? because of demographics.

Japan is the perfect example of this. But we also have a problem in the US. Baby boomers, which is the biggest generation in US history, are now retiring by the millions.

And the government has to pay their benefits. Everything from healthare to social security. And for years, the government collected extra money from boomers while they were working.

But unfortunately, our government did not invest that money really well. That social security trust fund went mostly into US Treasury bonds whose real interest rates were about in line with inflation. So now that boomers are retiring, the government is forced to sell those bonds back into the market to pay for their benefits, draining that trust very fast.

And here's the bigger problem. If that fund runs out, the government can't just stop paying Social Security because those benefits are guaranteed by law. and retirees depend on them to live.

So the government only has two choices. Raise taxes, which no politician wants to do, cut spending, which no politician wants to do, or borrow even more money, which just pushes us deeper into this entire cycle. Again, bonds are at the center of all of this.

And this demographic shift sort of explains exactly why the government debt problem is not just temporary, it's structural and basically unavoidable. Now, in one of the last slides from Lyn Alden's research, it really drives home just how deep this rabbit hole goes because take a look at this chart. It's called the debt ponzi because the system that we live in today relies on the constant need to borrow money.

Here's why. These charts show two very important things. the total debt across the entire US economy in blue which combines government debt and private debt and something called the monetary base which is in orange.

It's basically how much money the Federal Reserve has printed into existence. Now the difference between the monetary base and the total debt essentially shows us how much leverage there is in the system. Now notice something kind of incredible.

Since the 1960s, the total debt in the US has only ever gone down once, and even then just by a little. That was during the financial crisis of 2008, which is one of the worst things to happen to the economy in my entire lifetime. And that's when the debt briefly went down by just about 1%.

So this little tiny dip right here is just the small deleveraging of our debt. Now, in the last 110 years though, Lynn says that we've only had a grand total of five total years where this blue line has ever dipped. The Great Depression, which is between 1930 to 1934 and the 2008 financial crisis.

That's it. That's the only time our economy has delevered. Now, in 2008, unbeknownst to high school Andre, the total monetary base that made up the economy was about a trillion dollars.

But the total debt was 50 trillion. Meaning in 2008, the economy was levered 50 to1, which is insane. That means there's a lot of risk in the system.

But fast forward to today and our total debt stands at an astonishing $100 trillion. And any attempt to seriously reduce that debt actually risks collapsing the entire system. And that's why Lynn calls this entire financial setup a ponzylike system because it relies on the everinccreasing debt and continuous money printing just to keep itself going.

And here's the catch. The more money we print, the higher the risk of inflation and currency devaluation. And when investors start to realize that this is happening, guess what they say?

If I'm going to let the government borrow my money, I better get paid more because I'm taking on a higher risk. They demand higher yields for bonds. It all circles back again and again to the bond market, the foundation of the entire financial system.

So then the question becomes, have we ever been in this scenario in the last 100 years? And it turns out, yes, we have. It happened once back in the 1940s.

Now, this is probably the most important chart to study because it tells us something incredibly important. This is a 100-year chart showing how debt in the US economy has shifted between these two different types. the government debt in blue and non-government debt or private debt in orange.

Notice something amazing. The debt was shifted before in the past. Back in the 1940s, right after World War II, just like today in the 1920s and 30s, private debt grew so fast until it reached unsustainable levels.

Eventually that bubble bust leading to the Great Depression and then the government stepped in to borrow and spend massively causing government debt to skyrocket. The economy shifted from a private debt driven economy into a government debt driven economy. After World War II, the government was loaded with debt just like today.

But how did they fix it back then? They didn't exactly pay it off. Instead, they slowly lowered their debt through something called financial repression.

Basically, they kept interest rates artificially low and they encouraged inflation to eat away at the value of that debt and then they gradually shifted the burden back to the private sector over decades. Now, the government successfully got out of that mess by shifting somewhere else. But it took a really long time and it required huge economic adjustments.

But here's the problem for us today. We solved the debt in the 1940s because we had room to lower rates to boost our economic growth and the country had strong demographics, none of which we have today. Inflation's already a big concern and interest rates are actually going up, not down.

So yes, we can see clearly from history that these debt cycles have happened before, but we're now facing a very different set of circumstances where the tools that we use to get us out of that situation are already being used today. So clearly the system is strained and the trillion dollar question is what's the best thing that I can do to protect myself against all of these different economic outcomes? And that obviously depends on personto person, but for me at my age, at my risk level, at my current situation, I just buy the US stock market via an ETF called VTI because I think it stands to profit no matter what the outcome is.

But if all of that is wrong and we're going to pivot into a new economic system, I also buy Bitcoin because it stands to become a lot more valuable if the assumption is we try to print our way out of it by printing more base units to increase our base monetary supply. But I also own real estate and I have some cash on the sides just in case everything else fails and maybe there's some opportunity. But each bucket of my net worth represents anywhere between 20 to 25%.

And that's how I'm personally playing this out. Obviously, that's not necessarily going to work for everyone, but that's my approach. And I think at this point, not owning any hard assets is more risky than owning them.

And by hard assets, I'm referring mostly to things like gold and Bitcoin. My hard asset of choice is obviously Bitcoin, but it's not for everyone. However, if you are new to Bitcoin and you want to learn how to buy it, how to store it, how to protect it, I have a step-by-step guide that shows you how to do that.

You can use coupon code Andre 40 to get an additional 40% off the purchase price. As always, I'd love to hear your thoughts. I hope you have a wonderful rest of your day.

Smash the like button, subscribe if you haven't already. I'll see you soon. Take care.