The Nestmann Group

As the world celebrates Christmas, stock markets are cratering around the world, with the US leading the way. Since October, when the Dow Jones Industrial Average (DJIA) peaked at 26,951.81, it’s lost nearly 4,000 points, down 15.1%. The S&P 500 has lost even more: 15.8%.

The red ink in share prices has erased trillions of dollars from global balance sheets. The stocks comprising the S&P 500 have lost $2.39 trillion in December alone.

When asked why stock prices are falling, the talking heads on television and the internet point to the Fed’s continuing interest rate hikes and the ongoing trade war with China. Those factors are important, but there’s another component that gets less attention: soaring levels of debt. Much of that debt is of highly dubious quality. 

Earlier this month, the International Monetary Fund reported that the total world debt load is an incredible $184 trillion. That’s 225% of the entire world’s GDP and nearly double what it was in 2007 at the eve of the last financial crisis.

You may recall that the 2007 to 2008 financial crisis was set off by excessive debt. What started the ball rolling were a series of interest rate increases by the Fed. Homeowners with adjustable mortgages in which payments were tied to interest rates started to default in droves.

Many of the mortgages that ended up in default were “subprime;” extended to borrowers with poor credit ratings or who weren’t asked for proof of creditworthiness. In many cases, the mortgages were for 95% or more of the value of the home being financed. Meanwhile, the financial wizards on Wall Street turned sub-prime mortgages into mortgaged-back securities called collateralized debt obligations that were greedily lapped up by individual investors, hedge funds, and even pension funds....

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