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  1. Wealth
March 22, 2010

Sticky, not sweet

By Spear's

The bankers think they are dealing in harmless lollipops, but if the temperature rises, they could end up with a massive congealed mess.

If 2008 saw the banks in crisis and 2009 saw their stabilization by governments around the world, then 2010 began with the realization that transferring all those bad and doubtful debts in the banks onto public exchequers now threatens a series of Sovereign Debt Crises.

No wonder the market for Sovereign Credit Default Swaps, SCDSs, or national debt insurance wrappers, has grown fivefold since Lehman, but all on the simplistic assumption that CDSs generally spread risk. The bankers think they are dealing in harmless lollipops, but if the temperature rises, the thought that they could end up with a massive congealed mess of correlated risk never seems to occur to them.

Speaking of Japan, its national debt is 227% of GDP and rising every day, just like the sun. The Japanese, however, believe that as the national debt is lower than the private savings that they can continue borrowing without limit – as long as the pigs eat their slop and keep on gobbling up their BJBs (Bank of Japan Bonds).

Peter Bernholz’s Monetary Regimes and Inflation demonstrated that when deficits rise above 40% of public expenditure that you re on the first rung of the ladder of hyperinflation, also confirmed as entering the reality-zone when interest payable exceeds 12% of public revenues. Well, Japan is at over 50% and 13% respectively in 2010, which means the pigs in 2010 have to down for the first time more BJBs than the government raises in taxation, which is why QE is Printing Press spelt backwards in the Land of the Rising Debt.

The next countries experiencing national debt crises are the real Euro-PIGS, namely Portugal, Ireland, Greece and Spain, having caught a bad dose of swine flu by feeding in the euro-trough to excess. Having fattened themselves on free euros, they now discover the health warning on the back of the menu about financial obesity: this says that if you join the Club at the wrong rate then the euro’s One-Size-Fits-All will mean that you cannot control your inflation by rates set for the Franco-German axis.

Sarkozy and Merkel have a painful choice: either let Club O’Med go swing and end the dream of the eurozone, or import inflation as a result of propping up their inherited eurozone dream, and Germans just hate inflation. And don’t even think about the UK where Gordon Brown is in denial, while it’s only the prospect of the General Election that’s keeping the wolf from the door, until around 6 May, that is.

Greece is at the epicentre of the eurozone earthquake, and it didn t help sentiment when it was found out that they had limboed under the bar of the strict entrance criteria to the eurozone Club by subterfuge. This time the wooden horse was the ubiquitous ERSs and CDSs, while Odysseus was replaced by Goldman Sachs et al.

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It worked like this: Goldman, the great vampire squid wrapped around the face of humanity, relentlessly seeking to jam its blood funnel into anything that smells like money, caught a whiff of the precious substance in the land of Hector and Achilles and rode in to make their excessive debts, built up in the 20-year campaign to enter the euro, disappeared in a flash of blue smoke and mirrors.

The trick was to securitise future revenue streams, say from their equivalent of the NCP or any other reliable public income stream such as landing rights at airports, and with Exchange Rate Swaps insured by Credit Default Swaps, packaged these up for onward sale to investors – sounds familiar? – thereby leaving Greece with less income to pay future bills and facing the EU’s austerity measures.

Finally, to the US which has medium-term problems building up just about everywhere. It also is entering the Debt-Deflation dynamic. Uncle Sam is also up there with Japan on the Bernholzian barometer as well, as its deficit is rising above 40% of its public expenditures.

Oh! I nearly forgot to tell you, that Japan is holding $750.0 billion of US Treasuries and is not about to be in the position to add many more. In fact Japan, like China, could easily become a net seller.

Stephen Hill is economics editor of Spear’s and his book on the economic crisis, Countdown to Catastrophe (published February 2010), is available £20.00 + P&P direct to your preferred address. To order your copy now, email

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