Global debt deflation commenced on April 26, 2010 when the currency traders sold the worlds currencies, DBV, off against the Yen, FXY. This was just weeks after the Federal Reserve QE ended, and as the European Sovereign Debt Crisis was coming to a head.

Debt deflation is the contraction and crisis that follows credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

The greatest debt deflation came to the Russell 2000 shares, IWM, as these are dependent upon access to low cost credit which has not been available as the banks have not been lending and the European shares, FEZ, as these were impacted by the European Sovereign debt crisis.

As stocks, VT, rapidly fell in value, aggregate bonds, AGG, rose as a commonly perceived “safe haven” investment.

The apex in the chart of aggregate bonds, AGG, communicates” peak credit”; and that the “age of the end of credit” will commence soon.

Your presentation of the Reuters chart of Total U.S. Debt Public And Private showing US Debt to be 350% of GDP is helpful as it shows debt that can never be repaid. The chart shows a significant rise in financial sector debt especially since 2000 which when Wall Street financialization and securitization really took off due to the repeal of the Glass Steagall Act by a vote of 92 to 8 in the US Senate.

The US Ten Year note, IEF, is just now peaking; while the 30 year US Government Bonds, TLT, has peaked and is turning lower.

The yield curve, $TYX:$TNX, has been INCREASING, since April 26, 2010, because the 10 year rate has been falling faster than the 30 year rate.

The downturn in the 30 year US Government Bonds, TLT, should encourage institutional investors to go short the US Government bonds with the 300 percent inverse, TMV. When US Treasuries fail to auction, which will be soon, this will take off like a rocket greatly rewarding those who have invested in it.

Build America Bonds, BAB, show a topping out pattern.

Emerging Market Bonds, EMB, is peaking out.

Junk Bonds, HYG, is continuing upward.

The daily chart of high yield municipal bonds HYD Daily shows an awesome rise in high yield municipal bonds since April 26, 2010 … the weekly chart of HYD weekly shows that strong gains have been developing for a long time as investors have sought refuge from debt deflation destroying stock values.

Debt deflation which has been coming to stocks, will be coming to bonds as credit deteriorates. Very soon municipalities and states will be an epicenter of debt deflation, literally wiping out the value of HYD as the yield on HYD rises. Yes higher interest rates will come to this investment vehicle as credit ratings by the rating agencies drop, and as more and more cities and municipalities fail to make interest and debt payments because of revenue shortfalls.

Soon, municipalities will find themselves unable to borrow because interest rates will either be too high or the municipal bond market place will be closed because the US Treasury bonds will fail to auction. It is as Nassim Taleb relates: ”We Are Going To Have, At Some Point, A Failed Auction”.

Government employees with their high pay and high pension funded jobs have multiplied in municipal, state and federal government, creating a pay disparity between private and public sectors as documented by MyBudget360.com

Andy Fixmer and Christopher Palmeri of Bloomberg report on July 23, 2010: “U.S. cities and states may need more than $1 trillion of federal assistance in the next three years to stave off financial failure, former Los Angeles Mayor Richard Riordan said. Local governments are in a ‘race to the bottom’ and U.S. taxpayers will inevitably be called on to bail them out, Riordan said … The federal government should make pension, health-care and school reform a condition of receiving the aid, he said. ‘It’s not just L.A., it’s not just California, it’s all over the country, you’re going to see all these entities become totally insolvent,’ Riordan said. ‘I think the federal government has to come in and have a list of what the states have to do to be saved.’”

I see no chance, repeat no chance whatsoever, that the US Federal Government will come to the aid of municipalities or states. The money simply is not there, nor will it be there. We will soon see the end of entitlements – entitlement programs, with the exception of food stamps will be cut off.

The only monies flowing will be for strategic purposes. Austere sacrifices will be required for committment to President Obama’s International Order, that is the policy of global order of security and defense. GlobalResearch.ca reports the Xinhau news of July 17, 2010 that Canada is onboard for this endeavor as it plans to buy Buy 65 F-35 Lightning II Joint Strike Fighters.

The corporate bonds, CFT, have been driven up dramatically since July 14, 2010 due to the rise in currencies, DBV, and the rise in the US Ten year note, IEF. Higher interest rates across the board soon, will drive corporate bonds down and raise the cost of doing business at a time when corporate debt globally is coming due. This means many, many businesses will close and unemployment soar. Government finance ministers and state leaders will have no choice but to jointly announce austerity measures and bypass their national legislatures. Governments will become seignior, that is they will exercise seigniorage and become first, last and only provider of credit.

Interest rates are going higher soon for a number of reasons. One primary reason will be Treasury Auction failures. Soon, the interest rate will be out of the government’s control and they will no longer be subsidizing mortgage rates. Freddie Mac and Fannie Mae will not be funded as liquidity evaporates. Mortgages will not be offered by the GSEs or the banks.

If the lenders write down the mortgage debt to reach market values it will decapitalize them so severely that they will go out of business and the FDIC will not be able to close banks fast enough to keep up with the failures. Therefore, I see foreclosures (simply to get the people physically out of the house) and then the banks, Freddie Mac, Fannie Mae, and the US Federal Reserve leasing to someone who will pay rent. Perhaps there will be many people living in one property, that is multiple families, in violation of rules now existing in many better neighborhoods.

I envision, that out of the coming credit crisis, where there is no credit available, a Financial Regulator will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve.

As credit deteriorates, the value of excess reserves will rapidly decrease as well. Dr. Housing Bubble in article Japan Iwato And Heisei Stock And Housing Bubbles presents a chart of Excess Reserves totalling over $1 Trillion at the current time. These are largely the US Treasuries that the Federal Reserve swapped out to recapitalize the banks through its QE TARP Facility. The so-called excess reserves are residing at the US Treasury. As the value of US government bonds, IEF, and TLT, and ZROZ, falls lower, the value of the excess reserves will shrink dramatically in value, as either the banks pull them and sell to stay capitalized or simply “rot on the vine” so as to speak.

Utilities, XLU, have escaped debt deflation so far as dividend payment season approaches. And some utilities are paying exceptional dividends and it can be seen in their stock values soaring well above their April 26, 2010 values. Morris News Service reports that Southern Companies, SO, announced it is declaring a dividend of 45.5 cents per share, continuing an unbroken string of quarterly dividend payouts for more than 62 years. In April, Southern’s board of directors boosted the dividend rate 4 percent, the ninth year of steady increases. Southern’s dividend yield, the rate at which investors get a return on their money, is 5.14 percent. That compares to an average for the 15 companies in the Dow Jones Utilities Index of 4.4 percent.

The chart of these selected diversified utilities ED, WEC, NU, NI, WR, PEG, and LNT suggests these are approaching the end of their rise. The chart of ED shows a pop with lollipop hanging man candlestick. The chart of WEC shows an ascending wedge pattern. The chart of NU and NI and WR and LNT and PEG all show a double or triple top.

Institutional investors may want to consider investing in the Proshares 200% inverse of the utility stocks, SDP.

It is entirely possible, even likely, that stocks, ACWI, will fall lower as bonds, AGG, lose value. Institutional investors should consider the Morningstar report that The Profunds UKPSX, 200% short Japan, and the Direxion DXRSX, 200% Small Caps have been a consistently good performing bear mutual fund.

No matter how unlikely we are to make it to shore, we gotta keep swimming–there isn’t another choice.