The modern financial system relies on government debt as collateral, mostly for swap and repurchase transactions. However, the world’s central banks have soaked up much of that collateral. From The Zman on a guest post at theburningplatform.com:
One of the unintended consequences of a world of floating exchange rates has been the geometric growth of debt. The total amount of debt in the world currently sits at around $300 trillion, which is about three times the global GDP. That seems like an impossibility, but the value of all assets on earth is estimated to be around $300 trillion, which means every bit of potential collateral is pledged to someone, somewhere in some fashion. The world is literally drowning in debt, you could say.
Of course, those are just guesses. Some debt is actually listed as both an asset and a liability. Your mortgage is most likely in some sort of synthetic financial instrument as an asset against which there is some form of debt. Government bonds are used for collateral, as they are often considered the most reliable and trustworthy asset on earth. Banks soak up US debt, for example, because it is worth more to the bank than their cash deposits, as they can quickly package bonds into other financial transactions like repo agreements.
It’s also why the US government has no trouble finding willing lenders, despite having record debt and deficits. Those lenders are holding cash, which is not as valuable to them as the bonds. It’s not just the US government. The Germans also enjoy high demand for their debt. In Europe, the German Bund is the preferred collateral in finance transactions. In fact, it is so valuable, there is a shortage of it. The result is there is always pressure on the European Central Bank to not hold Germans bonds.
To continue reading; Collateral Damage
