The yield on France’s 10-year government bond has climbed above 4.2% — its highest level since 2008.
France already carries a high level of public debt and still needs to finance substantial budget deficits. The higher yields go, the more expensive that debt gradually becomes to service.
And the math starts getting uncomfortable.
Higher interest rates mean higher debt-servicing costs. Higher costs put more pressure on the budget. Larger deficits can then require even more borrowing.
Debt starts creating more debt.
France isn’t some small peripheral market either. It is one of the largest economies in the eurozone.
So when investors begin demanding significantly higher yields to hold its long-term debt, I pay attention.
But there’s another part of this that I find interesting.
The modern financial system is built on an enormous network of liabilities.
A bond is someone’s promise to pay.
A bank deposit is a liability of the bank.
Many financial assets depend on another party honoring its obligations.
Physical gold and silver have no counterparty risk.
When borrowing costs for heavily indebted governments return to levels we haven’t seen for many years, it shows just how much the environment has changed.
And in that kind of environment, owning part of your wealth outside the system of debt and financial promises makes more and more sense to me.
Not because I’m predicting a collapse.
Because it’s insurance in case more cracks begin to appear.
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