Posts Tagged ‘sovereign debt’

Ambrose Evans Pritchard’s latest…

August 8, 2011

You know how I feel about AEP.

Some interesting excerpts:

The decision to throw everything we had at the crisis after Lehman-AIG was a legitimate gamble at the time, given the near certainty of depression if shock therapy had been tried – as in 1931

In his opening salvo, AEP says that Keynesian policies have failed. Most Western countries have pushed their debt burden to the limits of safety and yet, our debt burden has not diminished.

It is too early to say the policy has failed, and failure is a false term when leaders confront cruel choices. Yet last week’s drama has brought home the truth that suffocating debt has not gone away; it has merely hopped on to the shoulders of sovereign states, threatening just as much damage.

Considering that the trajectory of debt has been demonstrably proved unsustainable for the past 40 years, one wonders why it should be puzzling that adding even more debt upon old debt should fail to diminish the overall debt burden…

I too want a column in The Telegraph.

But it gets better. Having established that overall debt burdens have worsened and are now threatening our entire socio/economic construct, AEP now advocates stretching this aberrant situation even farther in time… I am not making this up…

The US Treasury is right to disregard the verdict and keep risk weightings unchanged to avoid a cascade of forced debt sales.

In the same breath, AEP chastises the rating agencies for not having acted 6 years ago (whilst himself too was egging the farce on during the same period of time) but now wants to avoid doing what should exactly have been done 6 years ago if not earlier.

But it gets better.

If China had not distorted world trade in this fashion, the US would not be in such a mess.

Considering that the USA have been steadily devaluing the US$ over the past 40 years, and considering the WTO, and considering corporate tax legislation in the USA and considering the expedient manipulation lower of interest rates in the USA, and considering Western corporations are very happy to set up production facilities in China and sell their wares back into the West… saying that China distorts world trade is arrogant and ignorant mixed with decline-of-empire sour grapes.

But wait!! Just when you thought he might be done!

Unlike America, Europe still has stimulus cards it could play. Yet EMU politics prevents the use of these cards.

AEP just finished saying that Western countries are pushing the limits of this monetary system and our obtuse remedies have made things worse rather than better… and he goes on to lament the fact that there should be legislative obstacles to doing more of the same…

I absolutely must get me a column in The Telegraph too. Seriously; how difficult is it to dish out pablum and continuously contradict yourself?

Not content with having slagged China, AEP goes on to slag Germany.

“Germany still fails to understand the logic of monetary union: that (Teutonic) surplus states have a duty to boost demand in order to offset austerity in (Latin) deficit states until equilibrium is restored. Instead, Berlin is imposing a 1930s Gold Standard formula of deflation decrees through the EU machinery, with the burden of adjustment falling on debtor states. ”

Besides the fact that AEP claims there to be a logic in monetary union he also advocates that it is not those that have taken advantage of the system that should now pay the consequences. If the banks ever had any shills, AEP certainly qualifies as a high ranking officer in the shill army.

We may learn over coming days whether the European Central Bank is at least willing to stop the bond crisis in Italy and Spain from spiralling out of control.

The sheer inability of Mr. AEP to observe reality is staggering. I’m not an economist but if the ECB now has to bail out Italy it is because it has singularly failed staunch crisis in Greece, Ireland and Portugal. Considering that the financial crisis in these three countries is still smoldering and that countries like France are now about to lose their AAA at a time when the US has already lost theirs, why would throwing more money at Italy stabilize anything? And, anyway, didn’t AEP just say that we’ve been unable to diminish our debt burdens and that is a bad thing? So, which is it Mr. AEP?


The search for a scapegoat has begun.” claims AEP. All I can say is: pot, kettle. Remember what you just said about China?

In closing, AEP says:

Yet the Bank for International Settlements is surely right that we are pushing ever closer to the limits of a model that relies on artificial stimulus to keep stealing extra prosperity from the future. There is ever less to steal.”

What is that? Is it contrition? Is it resignation? Is it recognition of the fact that our leaders deliberately pursue aberrant and regressive policies?

Is AEP suffering from a psychological condition?

Thoughts on Japan

March 13, 2011

The tragedy befalling Japan is likely to have much wider consequences for the global economy.

Japan is already the single most indebted country in the world as compared to GDP. As a consequence of this earthquake and the destruction that it has caused, Japan will need to sell billions more of sovereign debt into the market. As a result, sovereign funding needs for Japan, the USA and Europe in 2011 are going to be in the $10Trillion range.

Where is this money going to come out of?

Moreover, coming on the heels of already heightened volcanic and seismic activity globally, I should think that the likelihood of more events taking place globally is fairly high.

Too, we’ll have to monitor whether Japan’s rice growing capacity is intact or has been hindered and, if it has, to what degree.

So that’ll probably mean more sovereign debt come flooding onto the markets at a time that sovereigns are already attempting to compensate for lack of funds globally buy ‘buying’ their own sovereign debt.

This is the predicament brought about by a debt based fiat monetary system.


This is what passes for policy today

January 20, 2011

World needs $100 trillion more credit, says World Economic Forum

The global credit stock has already doubled in recent years, from $57 trillion to $109 trillion between 2000 and 2009

Considering this is the meeting of the presumably leading lights of the world, our fate is sealed.

Even if you take the first caption that appears under the photograph at face value, any person that has ever had to run an activity or even just run a home budget can tell you that of two things, one must be true: either these guys are incompetent idiots or they are pathological criminals.

First off; the Bank of International Settlements estimates the global outstanding credit market at upwards of US$650Trillion. This is compared to a world economy that was at one point worth US$50Trillion. Right there, anyone with basic arithmetic abilities could marvel at how we might have been able to get this far without suffering a devastating crisis.

But BIS estimates not withstanding let’s take the caption at face value.

In nine years from 2000 till 2009, credit markets have doubled in value. Fine. What about our economies?

If we take the USA as our benchmark (the US economy not only makes up 70% or world economy but US banks are also the originators and holders of the largest chunk by far of all credit instruments globally), this is what it looks like:

FRED Graph
So, from 2000 till 2009 US GDP progressed from about 10T to about 14T… let’s say a round $15Trillion US dollars.
If you read previous posts on this blog, you will also know that since 1980 Federal debt has increased by well over 1000% whereas GDP barely doubled in size.
Now, not content with this dismal performance of always taking out more debt to stimulate an economy that for all intents and purposes has been overstimulated since 1980 our “leaders” are planning to throw another $100Trillion into this black hole that is now a confirmed and very well defined financial crisis due to insolvency.
This is what passes for “policy” nowadays.

Debt ceiling (re-post)

January 17, 2011

A re-post from just over a year ago and here we are today at a very similar juncture. Today the USA are non only rolling over all previous debt but are also considering raising the ceiling once again whilst Europe is going to roll over and seek somewhere in the neighborhood of E1Trillion (1 trillion Euro). So, in the spirit of our floating exchange rate sovereign currencies, only in terms of roll over and new debt, Western economies are looking to use their pension, insurance and sundry institutional funds to absorb some $2 Trillion.

Now remember, this is only what must be absorbed by all global sovereigns so as to keep our current monetary system alive. By way of comparison, this sum does not take into account any spending on, for example, pensions, health, road maintenance nor, indeed, the military or any new bail out fund that must be set up shortly. Just debt.

Begin re-post from November 2009 – and, by the way, the Fed has confirmed it is the single largest buyer of its own debt issuance… well on its way to become the single and only buyer…

This is going to be interesting.

If you read this essay and this essay, you will know I contend that we have reached the limit of how far we can expand inflation and that as a consequence, our Dollar based fiat monetary system is now broken. The most immediate concern is that deflationary environments bring about the insolvency of government.

Some of you will retort that governments have always been bankrupt but that somehow we’ve always come out ok.

What you are missing is the logic of inflation in a fiat monetary system characterized by floating exchange rate.

For as long as a government is able to borrow progressively more money, then its unfunded liabilities can be kicked down the road. Think of the pension trust fund. The money has been paid in all right. But government has used that money. Physically the money is no longer there; it has been spent. What governments count upon is inflation. Essentially, government feels free to spend today what it thinks it can repay back tomorrow in devalued currency. That in a nutshell, is what Western governments have been doing.

The above works for as long as inflation can be maintained on a positive trajectory and for as long as sovereign participants to the monetary system can and want to purchase each other’s sovereign debt (that is the meaning of floating exchange rates – i.e. the value of a currency is predicated on a basked of other currencies thus relying on sovereigns buying each other’s sovereign debt)

But pushing inflation into a system artificially, aggressively, pervasively and relentlessly over decades necessarily results in distortions, aberrations and criminal behavior. Thus, towards the end of the inflationary cycle, nominal profits progressively show up in fewer and fewer sectors until at the very end they show up only in the financial sector as the entity that is first in line for the use of fiat money.

The point at which nominal profits disappear from most sectors, is the point at which unemployment and social costs soar and is also the point at which tax revenue declines. This is the typical environment in which the power elites are also shown to be willing and consenting participants in unlawful and criminal enterprise.

Here is the problem.

As tax revenue declines, the ability of sovereigns to expand debt is hampered. On one hand declining tax revenue puts a dent in the budget that leads to credit worthiness revisions. On the other hand, as governments apply more of the tactics they think have enabled them to induce inflation into the system till recently (i.e. more spending on public projects, bailouts, military) they worsen an already critical fiscal situation.

This is the point at which sovereigns are either unwilling and/or unable to purchase each other’s debt.

The USA today have opted to increase the debt ceiling by $1.8Trillion.

Even assuming other sovereigns were willing and able to buy US debt, 1.8Trillion is a gargantuan chunk that would be tough to palm off during good times let alone during a crisis when all sovereigns are busy bailing out their own industries and banks.

Considering that the Fed has already been the purchaser of last and only resort of US debt in the past 8 months, it will be interesting to see who will buy any of this 1.8Trillion and how much of it. If the Fed should once again be the largest buyer as it has been in the recent past, the balance sheet of the entity responsible for the global reserve currency (the Fed) is going to show that the international monetary system is totally and utterly broken.

The stuff revolutions are made of (re-post)

December 5, 2010

I am still on the road. But this post from early 2009 is as topical as ever.


The stuff revolutions are made of

By guidoamm

I think it is by now a foregone conclusion that before the end of this year, regardless of what official statistics may show, most countries in the West will have to contend with unemployment in excess of 15% in real terms. It can be argued that at least the USA is already approaching that level and Spain, Greece and Italy aren’t far behind if not alrady at that level too. That in itself is cause for serious concern for governments. As unemployment grows and, necessarily, as the credit market collapses, inflation and demand collapse too engendering lower earnings and therefore lower tax revenue for municipalities, states and the government. As unemployment grows and the ability of governments to raise finance is diminished (rating agencies lowering credit worthyness of sovereign debt), government will have to redirect resources towards maintaining those promises and services the absence of which would more readily indicate that not all is well with the state: i.e. pension payments and any monetary disbursments perceived directly by the public. This of course will drain resources from departments such as the postal service, road works, civil administration, education, forestry services, fire fighting, international aid and so forth. Naturally, this will not be an event but a process whereby services will be gradually curtailed in order to conserve liquidity and pay those direct disbursements to the public. At some point though, something may happen to trigger the anger of the masses. It could be the death of a child because an ambulance did not show up in time or the death of a bunch of passengers on a bus or train due to absence of safety infrastructure or its state of disrepair. The trigger is not what matters; anything will do. What matters is that when unemployment is high, savings are low and prospects hazy, the masses get twitchy and can go on a rampage for any number of reasons. Politicians and administration officials don’t need me to tell them that even in a recession, let alone a depression, maintaining social harmony is a tall order particularly when the shenanigans of the power elite come to light as they inevitably do – that’s because as the tide goes out, you get to see who was swimming naked (think Madoff but count on many more to come out down the road). So, before we get to that stage which, in the current environment, could be as soon as the end of this year, governments will have to do something to shift the attention of the masses and keep them focused on something, or someone, that will be made out to be a threat to their well being. Therefore, unless some very bright government minion comes up with a brilliant solution to kick inflation up the ass and send it soaring again soon, that will be all she wrote folks. War will be upon us sooner than you can imagine.

The temperature is rising…

September 14, 2010

Nothing new to readers of this blog…

And then we have this from the man that not only single-handedly made the fiscal situation worse but the very man that blackmailed congress by painting an outcome of fire and brimstone if they did not approve the $700Billion he was asking for…

And from my favorite fiat money piñata…

… and although in this article it is not him speaking, we know he endorses the idea set forth by “Mr Blanchard called for extra monetary stimulus as the first line of defence if “downside risks to growth materialise”, but said authorities should not rule out another fiscal boost, despite debt worries. “If fiscal stimulus helps avoid structural unemployment, it may actually pay for itself,” he said.

I know I keep going over the same ground over and over again. But that’s because main stream politicians and economists drone-on about the same thing over and over again. Everybody and their cousin wants stimulus of one variety or another.

As far as I am concerned, I just wonder why nobody that matters has noticed that this time around doing more of the same may actually be counterproductive. Every single field of human endeavor is subject to the study of efficiency. Whether in science or agriculture or engineering, efficiency is a key parameter that is sliced, diced, studied and evaluated at all levels. So why shouldn’t the same degree of scrutiny apply to the monetary system? Why is it that main stream politicians and economists cannot see that money too conforms to parameters of efficiency?

In 100 hundred years since a select number of banks imposed our modern monetary system, the efficiency of money has been steadily declining. Today, in the absence of new markets or new currencies that could be absorbed in the US$ monetary system, creating and spending more money no longer gets us the desired result. The metrics are there and are available for anyone that wants to see:

Graph: M1 Money Multiplier

At a time when just about every single sovereign nation has spent all the money they have plus all the money they don’t have and will not have for decades to come, simple arithmetic says that we should try another tack.

But of course. In a democracy, spending cuts are politically untenable. Particularly when governments have played fast and loose with public finances for decades so that today larcenous and criminal strategies are necessary just to maintain the appearance of normality:

Today, the US Treasury department disclosed that its August deficit was a slightly better than expected $90.5 billion, compared to $103.6 billion in the year prior. What received less fanfare was that the comparable increase in debt in the month of August 2010 was $212 billion, compared to $143.6 billion a year earlier. In other words, more than twice the the deficit had to be issued in the month of August.

So, what do you think our politicians will do this time around?

You know what I think: 2013/2015 latest…

Prepare accordingly.

Chairman of Joint Chiefs of Staff Says National Debt Biggest Threat to National Security

August 29, 2010

With thanks to Zero Hedge

And that is exactly the reason we are about to be plunged into a war of global proportions.

To be clear, the past 100 years of monetary policy instigated and abetted by a select group banks is a deliberate mechanism predicated on the constant expansion of debt. As this policy inherently conforms to the law of diminishing returns there is a mathematical point past which more debt no longer can produce enough nominal revenue to service the debt. Ergo; we are technically bankrupt. That is, we can create more money but the traditional mechanism that is supposed to inject this new money in the economy is broken and no longer generates the economic activity required to feed state tax revenue thus by extension Federal revenue declines too.

Initial inevitable response is the following (again, with great thanks to Zero Hedge):


  • Total net debt issued since September 2008: $3,351 billion (from $10.025TR to $13.376TR)
  • Gross tax receipts since September 2008: $3,185 billion. Note this is not net of refunds. Should one exclude the $660 billion in refunds issued over the same period, the net contribution by taxpayers is just over $2.5 trillion, meaning that the value of each dollar of debt issued is a quarter greater than each dollar in taxpayer revenues.
  • This number would be somewhat offset by Corporate tax revenues, which over the same period amount to $440 billion gross and $230 billion net of corporate tax refunds.

Our governments are trapped. The choices are few and well defined and other than a war of aggression, all other choices are politically unpalatable at home in the ostensibly “civilized” West.

In accounting terms, what needs to occur is an immediate reduction of government expenditure and an immediate and drastic reduction in new debt issuance. Particularly in the USA, military expenditure must be drastically cut. Remember here that the USA’s military budget is larger than the military budgets of all developed nations combined. But cutting military budgets alone won’t do the trick particularly in Europe. Furthermore, since governments in the West have liberally helped themselves from social security funds that were ostensibly set aside for society (when governments borrow from social security these sums do not show in national debt statistics) this means that a very large chunk of social expenditure too needs to be curtailed. But as evidenced by Greece and soon by other Western civilized and developed countries, society does not take well to having their handouts taken away particularly when, in the particular case of pension contributions, these funds were supposed to have been set aside.

Debt and demobilization… (Adrian Ash)

July 4, 2010

If you follow this blog you know that, so far, I expect global conflict by 2015 latest.

Here’s an interesting piece by Adrian Ash. The reason I find this note interesting is not so much for what it forecasts. It doesn’t forecast anything. The note merely observes a dynamic that is intimately related to the life cycle of inflation and sovereign debt.

In one of my previous posts, someone asked how I think a war could be financed at this point in time. Obviously, when you observe the graph at the link above, it is clear that financing isn’t the problem. If the people go along with the scam, a government can create the financing; and wars against foreign evils have a way of rallying people around the flag… regardless of the overwhelming evidence that a country’s own politicians have plundered and pillaged society to the tune of billions of Dollars.

Oh boy!… here we go (401Ks and your retirement)

January 9, 2010

What a mess!


The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.”

In case you are unable to see what is happening, this is an attempt at propping up the treasury market. Remember when I wondered who might be able to absorb $1.8Trillion in new US debt in this comment? It looks very much like it is going to be you.

Very succinctly: in a fiat monetary system, government MUST manipulate interest rates lower so that it may borrow progressively more in order to satisfy it’s spending requirements and boost nominal GDP. But interest rates cannot go below zero (ok, the real interest rate may be below zero as it has been in the recent past but that’s something for another time). Once at zero, government total outstanding debt is horrendous so that, at that point, it becomes vital for government to keep interest rates low; and I mean VITAL.

FRED Graph

BUT!!  As other sovereigns are at once leery of the financial health of other sovereigns AND have to content with many of the same problems that their peers have to contend with, they may no longer be willing or able to purchase each other’s sovereign debt as contemplated by a floating exchange rates mechanism.

If nobody is buying sovereign debt, then, perforce, interest rates would rise naturally.

But in a situation where the state is overburdened by debt, a rise in interest rates spells bankruptcy.

So! What are you going to do?

The only way to keep interest rates low is to induce someone to keep buying your debt.

But if inducement is not working, then you force them.

And who can government force to do that short of going to war with other nations?

Why! It’s the person reading this note.

Interest rates at historic lows have only one way to go… and that is up….
Of course, if interest rates should rise as surely they will because the market will ensure they will, all the money invested in treasuries and bonds at this particular stage of the interest rate cycle, will evaporate.
Government “encouraging” you to opt for annuities is a boondoggle. It is a two pronged boondoggle come to that. Your savings go to the insurers (and by the way the government is already the largest insurer in the land as they own AIG) and the insurers must plow this money in Treasuries and Bonds in order to satisfy the annuities stream.

As to why “democracy” can only lead to bankruptcy…

January 7, 2010

Though unwitting, this is the clearest elucidation as to why our political system loosely defined as “democratic” is bound to spend itself into oblivion.


“[the ruling party] PASOK made wildly unrealistic pledges to secure election last autumn and is now in the uncomfortable position of having to tear up its manifesto. This is potentially dangerous in a Left-leaning political culture where people have yet to accept the need for harsh medicine. Mere hints of austerity over the past two years have been enough to set off street riots, while Communist trade unions are already threatening to strike.”

Essentially, on one hand our governments have failed in their fiduciary duty to provide society with proper education. On the other hand, due in large part to this fundamental shortcoming, we have allowed our “leaders” to build a political and economic systems that can only exist provided inflation can be constantly expanded. Thus, politicians will always make outrageous promises in an attempt to garner votes because offering restraint and a reduction in expenditure is guaranteed never to be seen as a viable option.

So, the point at which inflation can no longer be expanded or, more correctly, the point at which forced inflation loses its traditional multiplier effect on nominal values, our political process prevents us from offering the only solution that would help us come out of this jam; that is, a reduction in expenditure thus a reduction in debt.

And so it is that as inflation loses its perceived effect on the expansion of wealth (which is only nominal rather than intrinsic) then governments become bankrupt. To be clear. Western governments have been fundamentally bankrupt for decades. The difference between then and today is that till very recently government could progressively borrow more thus giving the impression of being able to service its financial obligations and its social and military goals.

Today, the debt dynamic is broken. Government is bankrupt. Social expenditure must be and will be curtailed.

Before large numbers of the great unwashed start roaming the streets looking for some politician or banker to lynch, we’ll have us a world war.

I say 2013/2015 latest