Topic: The Global Economy

[Thucydides]

given teh massive linkage between global economies, what happens "out there" can have deevastating effects "over here". While the growing US debt and deficits have the effect of a snake hypnotizing us economic mice, other forces are afoot which could blind side us and send the economy crashing like a house of cards:

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100002951/a-global-fiasco-is-brewing-in-japan/

A global fiasco is brewing in Japan
 
By Ambrose Evans-Pritchard Economics Last updated: January 12th, 2010

81 Comments Comment on this article

I have felt rather lonely after suggesting in my New Year Predictions that Japan is dangerously close to blowing up on its sovereign debts, with consequences that will be felt across the world.

My intended point — overly condensed  — was that 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

So it is nice to have some company: first from PIMCO’s Paul McCulley, who said that the Bank of Japan should buy “unlimited amounts” of long-term government debt (JGBs) to lift the country out of a “deflationary liquidity trap” and raise the souffle again.

His point is different from mine, in that he discerns deflation “as far as the eye can see”. But in a sense it is the same point. Once a country embarks on such policies, the game is nearly up. The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”

Japan’s deficits are already within the hyperinflation “red flag” zone identified by historian Peter Bernholz (”Monetary Regimes and Inflation” .. the Bible on this subject). As you can see from the charts below, prices start to spiral into the stratosphere once the deficits as a share of government expenditure rises above a third and stays there for several years.

The Bernholz range for the five hyperinflations of France, Germany, Poland, Brazil, and Bolivia over the centuries is surprisingly wide, from 33pc to 91pc. Japan has been in the that range almost continuously for the last eight years. The US joined the party in 2009. Japan’s Bernholz index will rise above 50pc this year for the first time, meaning that it will have to borrow more from the bond markets than raises in tax revenue. You see the problem.

We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue.

The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.

Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.

“This might very well precipitate other government funding crises. At the very least I’d expect it to trigger an international bond market rout scary enough to spook all other asset classes. So maybe we should all be concerned that Japan is in the hyperinflationary range. And if so, maybe we should think a little more carefully about how Western governments consider their debt burdens. Maybe Japan’s will be the crisis that wakes up the rest of the world,” he said.

Will it happen, this week, this month, this year, or will Tokyo keep the illusion of solvency going for years longer? Who knows. Japan is an endlessly mystifying society. But as Mr Grice puts it, if you are sitting on a tectonic fault line, expect an earthquake.

[Thucydides]

More on global debt:

http://www.barrelstrength.com/2010/01/27/fate-of-nations/

Fate of Nations

January 27, 2010 10:21 am Arran Gold American Politics, Canadian Politics, Economics and Finance

Bill Gross of PIMCO is well known for talking up things that would most benefit his bond funds but this chart is too interesting to pass up.

The most interesting data point in this graph is Japan.  A country with declining demographics and a significant outstanding debt.  With no way to get out of mountain of debt it is safe to say that Japan as nation is in deep peril.  The problems of Greece are well known, along with their inability to do anything about it, which brings us to Canada.

If that graph had been done in the ’90s, Canada would have been a proud member of the “Rings of Fire” club.  What changed?  Starting in the early 90s the size of the Canadian government diminished and that was made possible by majority government under Liberals, which did not have to engage in negotiations with the opposition parties to implement their agenda.  This is instructive because of the problems US will face, when trying to tackle their debt.    California gives us insight into how problem will unfold at the federal level in US.  Specifically the inability to reach an agreement on budget, which Canada was able to avoid due to its parliamentary structure.  Can anybody in US say Second Republic?

Bill Gross goes on to paint a grim picture of UK, which your correspondent cannot disagree with.

[E.R. Campbell]

And then there’s this, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post:

http://network.nationalpost.com/np/blogs/fullcomment/archive/2010/01/28/terence-corcoran-the-loopy-obama-sarkozy-axis-of-trade.aspx

Terence Corcoran:
The loopy Obama-Sarkozy axis of trade

January 28, 2010

Both leaders appear to want to manipulate world trade

By Terence Corcoran

Vive la France! For a country that today portrays itself to be in the midst of a great transformation form hog-tied protectionist welfare state to bold new global market player, France has a strange way of conveying that message.  On Wednesday, Francois Delattre, France’s ambassador to Canada, was telling the National Post’s editorial board in Toronto that his country had undergone a “sea change” and that a “new France” was set to become a “new player in a globalized world.” A few thousand kilometres away, his president, Nicolas Sarkozy, delivered a barn-burner speech in Davos, Switzerland,  filled with some very old France ideas. Vive la France contradictoire!


Forbes Media editor Paul Maidment, writing from Davos, said that in his address to the assembled panjandrums at the World Economic Forum Mr. Sarkozy seemed to be “sketching out a French version of the Scandinavian Mixed Economy Model for the post-crisis world.” Somebody else called it the most socialist speech he had ever heard from a self-proclaimed right-of-centre leader. It looked, said Mr. Maidment, like Mr. Sarkozy was staking out his ideological agenda for when France takes over leadership of the G20 later this year.


Heaven help the G20, which means heaven help Canada, among others.  Along with Mr. Sarkozy’s occasionally loopy economic analysis, Canada and the rest of the members of the G20 power circle are also going to have to grapple with the equally silly, even incoherent, economic agenda now being promoted by U.S. President Barack Obama.


In his State of the Union address Wednesday night in Washington, Mr. Obama’s populist bellringers struck the same notes as those clanged a few hours earlier by Mr. Sarkozy in Davos. They bashed banks, dumped on markets, vowed to revamp capitalism and blamed the crisis on everybody but government. Governments were riding to the rescue. Mr. Obama lamented that “bad behavior on Wall Street is rewarded, but hard work on Main Street isn’t.” Mr. Sarkozy said “We are not asking ourselves what will replace capitalism, but what kind of capitalism we want.”


To offset markets and globalization, said Mr. Sarkozy, we need “counterbalances and corrective measures.” Mr. Obama offered a long list of his own corrective measures to the endless list of perceived market failures.


But it is on trade issues that both leaders promoted ideas that should be  ringing bells. What seems to be taking shape is a new movement to begin manipulating trade.


Sarkozy the trade strategist: “It will not be possible to emerge from the crisis and protect ourselves against future crises, if we perpetuate the imbalances that are the root of the problem. Countries with trade surpluses must consume more and improve the living standards and social protection of their citizens. Countries with deficits must make an effort to consume a little less and repay their debts.”


Obama the  trade strategist: “We need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.”


The idea that trade is somehow out of balance around the world, and needs to be fixed by governments deliberately imposing policy and programs, is an economic idea long ago dismissed and even ridiculed. In Mr. Obama’s case, he is dragging America back to mercantilism — the idea that countries get rich and create jobs via exports. Imports — of oil and energy, for example — are seen as drags on the economy that suck jobs away. In Mr. Obama’s world, companies that produce shoes in India are depriving America’s economy of employment and prosperity.

What really creates jobs and prosperity is trade, not exports.  And trade on a global scale is never and cannot be balanced on a nation-to-nation basis. It is impossible. And it is undesirable and dangerous to want to bring about such balances by government action. Mr. Obama’s plan to “double our exports” over the next five years sets a goal that is unachievable by any government policy. No economic theory that’s still valid today supports the use of government policy to foster  exports for the sake of exports, on the grounds that any such measures can only lead to trade frictions, even trade wars, and a decline in the real wealth creator — free trade.


Even greater risks exist when groups of governments, through the G20 or via any other collective effort, attempt to manage multi-lateral trade or realign trade to achieve some fantastic ideal of multi-national “balance.” There’s no such thing. 


In the months to come, somebody needs to make sure Mr. Sarkozy and Mr. Obama never end up in the same room at the same time. We don’t want the U.S. to end up like France — new or old.

Corcoran is right: global trade is ‘in balance.’ Those with lots of cash on hand can buy whatever they want; those who need cash must sell at a discount, to gain market share. If American or French prices need to be lowered to remain competitive then Americans and the French must settle for lower wage and longer hours or they must learn to work smarter – something at which the Americans have, in the past, been very successful and at which the French have, broadly, failed.

One alternative is to do with less, accept a lower standard of living - which is what Canada has done since the 1970s; another is to borrow more - which is what America has been doing for a generation and what Canada did, to finance its unsustainable social safety net, from 1970 to 1995. But it’s not clear, to me that those awash in cash (China, India, too) are willing to keep buying USD Treasuries when Barak Obama appears intent of making the US dollar worthless. No one wants to be paid in monopoly money.

[Thucydides]

The more things change:

http://www.theglobeandmail.com/report-on-business/commentary/brutal-economy-of-1700s-has-an-eerie-similarity/article1448623/?cid=art-rail-marketing

Brutal economy of 1700s has an eerie similarity

A central bank and a brilliant central banker, easy credit and novel financial investments, high taxes and expansive state debt

Neil Reynolds

Published on Friday, Jan. 29, 2010 12:00AM EST
 
Last updated on Friday, Jan. 29, 2010 6:19AM EST
 
Robert Prechter, the iconoclastic Atlanta market analyst (publisher of the Elliott Wave Theorist), says the world remains in a bear market of "supercycle" degree - meaning that the world's current economic troubles will be "the deepest and longest since the 1700s." Assume for a disturbing moment that he is right. What went wrong in the 18th century? In what way are we replicating the wrong? What consequences should we anticipate?

Here is an instructive guide to the early 1700s: English author Janet Gleeson's Millionaire: The Philanderer, Gambler and Duelist Who Invented Modern Finance, a prescient 1999 book aptly reissued in paperback last year by Simon & Shuster.

Writing in fine narrative style, Ms. Gleeson tells the tale of John Law, the charismatic Scottish gambler who became the central banker of France and, for all practical purposes, of Europe - taking control of a bankrupt country after the death of Louis XIV in 1715, radically replacing gold coins with paper currency, and setting off one of the greatest spurts of economic expansion in history.

Ms. Gleeson tells more sobering tales as well - of John Law's infamous Mississippi Company, of government-decreed credit at 2 per cent, of banks without reserves, of the inevitable Great Crash when the irrational exuberance abruptly ended in 1720. Of extraordinary distress and profound want. "Thus ends the system of paper money," a contemporary wrote, "which has enriched a thousand beggars and impoverished a hundred thousand honest men."

So obvious are the parallels to the modern world, Ms. Gleeson observes, "Law's story holds uncanny relevance" for the 21st century.

The stock market gains of the 20th century pale in comparison to John Law's brief era of central bank innovation. "Law sparked the world's first major stock market boom," Ms. Gleeson writes. "So many people made so many vast fortunes that the word millionaire was coined to describe them. Almost overnight, [Law] became a heroic figure, feted throughout Europe and promoted [to] the most powerful public position in the world's most powerful nation."

Investors from England, Germany, Holland, Italy and Switzerland "stampeded" to Paris to play the markets, driving the share price of the Mississippi Company (which held monopoly trading rights in the French territories of the New World) from 150 livres to 18,000 livres in a matter of months. In comparison, Ms. Gleeson says, the best bull market of the 20th century occurred between 1990 and 1999 when the Dow rose by 380 per cent and Nasdaq by 790 per cent. Next to Law's stock play, she says, these excesses were paltry.

Beyond doubt a financial genius, Law anticipated - indeed, largely invented - the paper currency of modern times along with the central banks that control it. When Law established his own private bank in 1716, he improvised a paper currency and backed it with gold reserves equal to 25 per cent of the paper in circulation. It was highly successful. When nationalized in 1718, it became the Banque Royale, the State bank, and Law became its sole director. The State, though, was less patient. It dictated progressively more currency and progressively fewer reserves.

The Great Crash, when it came, was cataclysmic. Stock market prices collapsed; the Mississippi Company lost 98 per cent of its capitalization. Thousands of people, high and low, fell from riches to poverty. In Paris, mob violence ensued - with unprecedented numbers of robberies and killings. Law himself narrowly escaped death. Obsessed again by gold, France banned paper money and sought a royal monopoly on gold and silver. Naturally, it prohibited private ownership of jewellery and gold crucifixes.

Speculators exited France with whatever wealth they could salvage - and moved across the Channel to London where they proceeded to re-invest in already inflated South Sea shares, driving England toward a Great Crash of its own. Shares that traded for £130 in January changed hands for £1,050 in June. Everyone participated - "country parsons, impoverished widows, kings, princes, courtesans, yeoman farmers, eminent scientists, philosophers, writers, artists - all caught the contagion."

In Paris, the burning of paper currency became public spectacles, the bonfires witnessed by throngs of thousands. The poor scavenged for survival - even as the rich (the lucky gamblers who took their profits early) "danced on," as Ms. Gleeson puts it, putting in place the necessary conditions for the French Revolution. There is always, in hard times, wealth enough for decadence. "During the Great Depression of the 1930s," Ms. Gleeson notes, "[New York's] Waldorf Astoria was fully booked."

The checklist from 1720 remains relevant: a central bank and a brilliant central banker, easy credit and novel financial investments, high taxes and expansive State debt to appease the populace. Was 1720 a unique calamity? Perhaps. As Ms. Gleeson says, though, these same forces have since then combined repeatedly to produce economic disasters. They appear "little altered," she says, "in 300 years."

[Thucydides]

European debt threatens economic recovery. The question I have is will the EU cut loose anyone who threatens the stability of the combined recovery, or will they dig themselves in deeper trying to keep underperforming national economies afloat. (History suggests plan "B")

http://www.theglobeandmail.com/report-on-business/economy/recovery-teeters-as-debt-threat-spreads/article1458282/

Recovery teeters as debt threat spreads
 
Portuguese civil servants on Friday protest in Lisbon over the government's decision not to raise wages in 2010.
Portuguese parliament defeats austerity plan, spooking investors; hangover from financial meltdown shows no sign of ending soon

Washington — Globe and Mail Update
Published on Friday, Feb. 05, 2010 7:29PM EST
 
Last updated on Friday, Feb. 05, 2010 7:36PM EST
 
The world may have averted another Great Depression, but the aftershocks of the 2008 financial meltdown continue to rattle the global economy.

The debt threat stalking some of Europe's weaker economies, the tumbling euro, the United States' eye-popping deficit and its still-deteriorating job market are all powerful reminders that the deep-rooted fiscal problems that pushed the global financial system to the brink continue to pose serious risks to stability.

The latest flashpoint is Portugal, where the country's parliament defeated an austerity plan Friday. The rejection spooked investors from Toronto to Tokyo, pushing stocks sharply lower again Friday before North American buyers returned in the late afternoon and brought markets back into the black near the close.

Although U.S. (DJIA-I10,012.2310.050.10%) and Canadian (TSX-I11,223.1294.360.85%) stocks climbed back Friday, most major global indexes lost ground again for the week, leaving stocks with a poor start for the year as investors continue to flee risk. European shares were particularly hard hit amid fears of ripple effects from a growing debt crisis in Portugal, Greece, and Spain.

The renewed concerns about countries' fiscal situations come as G7 finance ministers gather in Iqaluit to address key financial regulatory issues. Canadian Finance Minister Jim Flaherty said Europe's deteriorating fiscal picture will be a point of discussion.

German Finance Minister Wolfgang Schaeuble told reporters in Iqaluit that Greece has to “pay the price” for running up the largest budget deficit in the European Union.

A major European stock index – the Dow Jones Euro Stoxx 50 – sank more than 5 per cent on the week, pushing losses to more than 11 per cent so far this year. The U.S. S&P 500 slipped nearly 1 per cent on the week, while the S&P/TSX composite index managed a gain of about 1.2 per cent, leaving both indexes with year-to-date losses of more than 4 per cent.

The global stock market's sudden weakness unwinds some of the months-long rebound as investors awake to the possibility that recovery could be a decade-long project, rather than a quick turnaround.

The reality of a slow recovery was underscored by another month of disappointing jobs data in the United States. The unemployment rate fell to 9.7 per cent, but the economy shed another 20,000 jobs. And a staggering 8.4 million U.S. jobs are now estimated to have been lost since the recession began.

The big worry in late 2008 and early 2009 was the collapse of the banking system. Now, the angst is about government debt.

“The legacy of the credit crisis is long-running and has a lot of reach,” explained Sal Guatieri, an economist at BMO Nesbitt Burns in Toronto.

“What we've done essentially is move debt from the private sector to the public sector, and spread the payments over generations. We haven't addressed the fundamental issues [needed] to limit the risk of another crisis.”

The good news is that bank bailouts, easy money and gushers of government stimulus probably saved the global economy from collapse.

The downside is that those efforts shifted the world's debt hangover from consumers and businesses onto the backs of taxpayers.

“There is no easy way out,” Mr. Guatieri said. “People have to pay down their debts. Eventually, governments will also have to reduce their debts. So you're not talking a one or two-quarter workout for the economy, or a year. You could be talking about a couple of years, if not a decade.”

The stock market correction also reflects mounting economic and political uncertainty that extends well beyond a handful of countries in Europe.

Since 2007, governments and central banks have spent eye-popping amounts of borrowed cash to save the system – $11-trillion (U.S.) to prop up banks and another $6-trillion in stimulus.

The big question now is what countries can afford the mortgage. And in recent months, speculators have taken aim at countries they see as the weakest links, including Dubai, Ireland and the so-called PIIGS of Europe – Portugal, Italy, Ireland, Greece and Spain.

But economists warn that the larger industrialized economies of North America, Japan and Europe won't be immune to similar sovereign debt pressures forever. Without exception, countries are facing rising deficits as they try to spend their way out recession amid falling tax revenues.

The same problems plaguing Portugal and Greece could be “dress rehearsal for what the U.S. and U.K. may face further down the road,” Jim Reid, a strategist at Deutsche Bank in London, warned in a research note.

And in a sobering opinion piece in Friday's Wall Street Journal, New York University economist Nouriel Roubini and Eurasia Group president Ian Bremmer argued that the same pressures will eventually force the United States to put its fiscal house in order by raising taxes and slashing government entitlements, such as Medicare and Social Security.

“As the Federal Reserve begins to raise interest rates to head off inflation … foreign investors and central banks will be willing to finance the U.S. only at higher yields,” they wrote. “That's where sovereign risk meets sovereign reality.”

In the U.S. jobs report, particularly sobering is the revision of jobs data back to April, 2008, by the U.S. Bureau of Labour Statistics. The 8.4 million jobs that have been lost since the recession began eclipsed the previous estimate of 7.2 million.

Those 8.4 million jobs represent 6.1 per cent of the work force, making this by far the worst recessionary contraction in the labour market since the Great Depression. Even during the 1980-82 recession, the labour force shrank by only 3 per cent.

“Nothing even comes close in the modern era,” BMO Nesbitt Burn's Mr. Guatieri said.

With files from Bloomberg News

Some interpolations.

The US unemployment rate is far higher than the official estimates, and has been calculated to run as high as 17 toi 22%. This includes "discouraged workers" who no longer seek employment and under the table workers eaking out a living in "the gig economy" performing odd jobs whenever they can.

Canada has the ability to eliminate the debt in six years by eliminating transfers to governments, subsidies and crown corporations (ignoring virtuous circle effects like savings in government operations and reductions in payments to the $30 billion/year carrying costs of the national debt). Of course the theoretical ability to eliminate the debt in a short period of time does not translate into the political will to do so; lots of pressure will need to be applied and political rent seekers who feed off these transfers will fight to the last taxpayer to maintain their positions at the trough. Still, the possibility of getting out from under the debt trap should be appealing at some level.

[Thucydides]

Yo yo yo, listen up an get the lowdown on da boom an da bust:

http://www.youtube.com/watch?v=d0nERTFo-Sk

"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem

[Antoine]

You might find the following topic in Science magazine (one of the highest ranking journal in the science world) of interest. They are making access to this for FREE on line but keep in mind that some articles might fall in ``scientific reductionism`` which is not always the best angle to solve humanitarian problems.

Special Online Collection: Food Security, Science, 12 February 2010

www.sciencemag.org/special/foodsecurity

In the 12 February 2010 issue, Science examines the obstacles to achieving global food security and some promising solutions. News articles introduce farmers and researchers who are finding ways to boost harvests, especially in the developing world. Reviews, Perspectives, and an audio interview provide a broader context for the causes and effects of food insecurity and point to paths to ending hunger. A special podcast includes interviews about measuring food insecurity, rethinking agriculture, and reducing meat consumption. And Science Careers looks at interdisciplinary careers associated with food security. Science is making access to this special section FREE (non-subscribers require a simple registration).

[Thucydides]

The apocalypse of debt. If you have the resources you might be able to capitalize on this, otherwise invest in home gardens, home and car repair skills and distributed energy systems:

http://www.forbes.com/forbes/2010/0208/debt-recession-worldwide-finances-global-debt-bomb_print.html

The Global Debt Bomb
Daniel Fisher, 02.08.10, 12:00 AM ET

Kyle Bass has bet the house against Japan--his own house, that is. The Dallas hedge fund manager (no relation to the famous Bass family of Fort Worth) is so convinced the Japanese government's profligate spending will drive the nation to the brink of default that he financed his home with a five-year loan denominated in yen, which he hopes will be cheaper to pay back than dollars. Through his hedge fund, Hayman Advisors, Bass has also bought $6 million worth of securities that will jump in value if interest rates on ten-year Japanese government bonds, currently a minuscule 1.3%, rise to something more like ten-year Treasuries in the U.S. (a recent 3.4%). A former Bear Stearns trader, Bass turned $110 million into $700 million by betting against subprime debt in 2006. "Japan is the most asymmetric opportunity I have ever seen," he says, "way better than subprime."

Bass could be wrong on Japan. The island nation (and the world's second-largest economy) has defied skeptics for so long that experienced traders call betting against it "the widowmaker." But he may be right on the bigger picture. If 2008 was the year of the subprime meltdown, 2010, he thinks, will be the year entire nations start going broke.

The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell--for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery. Traders like Bass could make a lot of money betting against sovereign debt the way they shorted subprime loans at the peak of the housing bubble.

National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceding five years. The U.S. has allowed the total federal debt (including debt held by government agencies, like the Social Security fund) to balloon by 50% since 2006 to $12.3 trillion. The pain of repayment is not yet being felt, because interest rates are so low--close to 0% on short-term Treasury bills. Someday those rates are going to rise. Then the taxpayer will have the devil to pay.

Whether or not you believe the spending spree was morally justified, you have to be concerned about the prospect of a dismal, debt-burdened fiscal future. More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. The coauthor, with Harvard professor Kenneth Rogoff, of This Time It's Different: Eight Centuries of Financial Folly (Princeton, 2009), Reinhart has found that a 90% ratio of government debt to GDP is a tipping point in economic growth. Beyond that, developed economies have growth rates two percentage points lower, on average, than economies that have not yet crossed the line. (The danger point is lower in emerging markets.) "It's not a linear process," she says. "You increase it over and beyond a high threshold, and boom!" The U.S. government-debt-to-GDP ratio is 84%.

We've been through this scenario before. It's especially ugly because we get hit by inflation, too. In the years immediately after World War II inflation surged past 6%, while economic growth flagged and the government-debt-to-GDP level exceeded 90%, note Reinhart and Rogoff. The country worked that ratio down over the next half-century. Now the ratio is shooting up again.

America is a nation of spendthrifts, addicted to easy credit and dependent on the kindness of savers overseas to keep us comfortable. Our retail industry hangs on credit cards and our real estate on 95% financing and the tax rewards for mortgage interest. The personal savings rate has climbed from negative 0.4% in 2006 to a positive 4.5% rate now, but that is still a pathetic figure for a nation whose government is un-saving all that and more with its deficit budget. Politicians on this continent are good at compassion, whether trying to help people stay in their overpriced homes or offering health care to millions of those without it. They are not so adept at nurturing growth.

If the GDP doesn't expand at "normal" rates of 3% to 5% coming out of this recession, wrestling down the debt will be very tough, indeed--perhaps impossible without drastic cuts in spending and higher tax rates on many fronts. The Congressional Budget Office currently projects the fiscal deficit will decline from 10% of GDP next year to around 4.4% from 2013 to 2015. But that assumes economic expansion of at least 4%, not the 2% predicted in the study by Reinhart and Rogoff. You see the vicious cycle here: Debt depresses growth, and then low growth makes paying down the debt an impossible task.

U.S. corporate income tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion. It may be a long while before these tax collections get back to where they were. As corporate profits recover, factory utilization will be up and inflation will be close behind. At that point the 0% yield on Treasury bills will be history. Rolling over the national debt will become a lot more expensive. Higher rates on Treasuries will work their way through the debt market, driving up the cost of money for homeowners, businesses and already struggling state and local governments.

"The economy over the last six months has been on a sugar high," says Benn Steil, senior fellow at the Council on Foreign Relations and author of Money, Markets and Sovereignty (Yale, 2009), a survey of the relationship between money and the state. If Congress and the Obama Administration don't trim deficits, he says, "we will get to the point where credit is much more expensive in the U.S. than it ever has been in the past."

Most states are already having trouble paying their bills and, of course, don't have printing presses with which to finance their debts. They are turning to Washington for help and may succeed in putting some of their liabilities on the federal balance sheet. With growing off-balance-sheet obligations, notably unfunded pension liabilities (see graphic in "Debt Weight Scorecore"), the states will be competing for years with the federal government for scarce taxpayer dollars.

"U.S. states are like emerging markets," says Reinhart. "They spend a lot during the boom years and then are forced to retrench during the down years." Cutting expenses sounds good theoretically, but look at California: Students (and faculty) are up in arms over proposed tuition increases and cutbacks at the state's once prestigious university system; state employees are mounting a fierce legal battle against furloughs and other wage concessions.

Mainstream credit analysts are worried. The U.S. has been able to sell vast amounts of debt because the Treasury market, with $500 billion a day in turnover, is considered safe and dwarfs all other debt markets. But Brian Coulton, head of global economics at Fitch Ratings in London, warns that once rock-solid economies like the U.S. and the U.K. could join shakier nations like Japan and Ireland in losing their aaa ratings if they don't get their bad habits under control. "While aaas can borrow in the short term, very high and rising government debt-to-GDP ratios are ultimately not consistent with aaa status," Coulton says.

Unchartered Waters
Governments around the world will issue an estimated $4.5 trillion in debt this year, triple the five-year average for industrial countries.

It's the Total Debt, Stupid
Private banking assets tend to become public problems in a crisis. By that measure European countries are far worse off than the U.S.

A FORBES survey of sovereign credit, taking into account trends in spending and revenue, economic freedom and the price of the debt insurance, a.k.a. credit default swaps, ranks the U.S. number 35 in a class of 85, below Germany, the Netherlands and China. The cds market is priced to imply a 3.1% chance of default over five years on Treasury debt. Other countries are likely to hit the debt wall sooner, and with greater impact. The U.K., for example, is 38 on the list, two notches above Slovenia. One culprit is much higher levels of private banking debt that could land on the British government balance sheet á la Fannie Mae and Freddie Mac in the U.S. The sovereign debt of the U.K., plus the assets of its five largest banks, exceeds 500% of GDP, compared with 200% in the U.S. Even closer to the edge is Ireland. Sovereign debt is at 41% of GDP. But total banking-system assets are another 800% of GDP (see graph above). If those assets sour, the government will almost certainly step in to protect the banking system, as Iceland was forced to do in 2008. Iceland's currency and stock market collapsed soon thereafter, and its president recently blocked a law to repay $5 billion-plus to British and Dutch investors. That move puts at risk a pending bailout package for Iceland from the International Monetary Fund and its application to join the European Union.

Most investors seem to believe, as the late Citibank chairman Walter Wriston put it, that "countries don't go bust." The opposite is true. "There was a massive default wave in 1980s and 1990s," says Reinhart. Investors may not have paid much attention since the defaults were mostly in emerging market countries like Guatemala and Romania. But the deadbeats included current investor favorites like Brazil, which defaulted in 1983, went through a bout of hyperinflation in 1990 and effectively defaulted again, for the same reason, in 2000. Reinhart and Rogoff show that, on average, nations add 86% to their debt loads within three years of a credit crisis. At the same time, government revenue falls an average of 2% in the second year after the onset of the troubles (see timeline, below).

The Stumble Cycle
Sovereign defaults--when a country stops paying its bills--go in waves, often following global financial crises, wars or the boom-bust cycles of commodities. Some countries, like Spain and Austria, mend their ways; others, like Argentina, are repeat offenders.

The combination can be fatal for investors holding bonds issued by financially shaky countries like Argentina or Greece, which sell a lot of their debt outside their own borders (as does the U.S.--45% of all publicly held debt). As a nation's finances deteriorate, foreign investors sell their bonds, putting upward pressure on interest rates. That usually sets off a spiral including a deteriorating currency, which, if the bonds are denominated in foreign currencies, makes it impossible for the country to pay its debt. Greece doesn't have to worry about this last syndrome, because it uses the euro. But that might make things worse since it can't print its way out of its financial difficulties. "It's like entering a prize fight with one hand tied behind your back," Bass says. Argentina takes a different tack. Still struggling in the wake of its 2002 default on foreign-held debt, its president recently tried, and failed, to seize central-bank dollar deposits (and cashier her central banker) in order to repay overseas debt.

Even if countries don't stiff creditors outright, they can sometimes accomplish the same thing through inflation. Reinhart and Rogoff found this to be the case in roughly one-third of the countries they tracked that had currency depreciation rates above 15% a year, following the 1980-81 recession. Of course, this works only for debt denominated in the home currency and only if investors are taken by surprise. If they see inflation and devaluation coming, they price it into the interest they collect.

Making money on sovereign defaults isn't as easy as picking off subprime mortgages. Credit default swaps on potential basket cases like Dubai, Greece and Ukraine have doubled and tripled in price over the past 12 months as their debt loads grew. To buy insurance against a default in Greece over the next five years costs 3.4% a year.

How about Switzerland--once considered an impregnable money center? Credit default swaps on Swiss debt cost 46 basis points (0.46% a year), compared with 33 for the U.S. The Swiss government is not itself deeply in hock, but it may have to bail out its private banks in the manner of Iceland or Uncle Sam. Swiss private-bank debt is seven times GDP. The U.S. isn't a disinterested bystander: The Swiss central bank borrowed $40 billion from the Federal Reserve under a little-known swaps program last year to remove bad assets denominated in dollars from private banks. The Fed considers the transaction low risk because the Swiss promise to repay in dollars. But it signals how losses on private loans--in this case, U.S. subprime mortgages--can cycle back into a problem for the Swiss government. As hedge fund operator Bass notes, a 10% hit on Swiss banking assets would represent 80% of its 2008 GDP of $488 billion and 400% of annual government revenue. "You can invest a very small portion of capital, so if you're wrong it costs very little," says Bass. "If you're right it can pay hundreds of percent."

Shorting countries comes naturally to Bass, 40, who has spent most of his career investigating overvalued stocks and bonds. The son of the onetime manager of the Fountainbleau Hotel in Miami, Bass grew up in Dallas and won a diving scholarship from Texas Christian University in Fort Worth, where he studied real estate and finance.

He spent most of the 1990s at Bear Stearns in Dallas, attracting a group of well-heeled clients who took his advice on shorting stocks like Delgratia Mining Corp. of Vancouver, B.C., which plunged after a highly touted gold find in Nevada turned out to be a hoax.

Around that time Bass learned the danger of betting too much on his own research. He shorted the stock of RadiSys, a telecom technology maker in Hillsboro, Ore., after he called the company's recently departed chief financial officer at home and was told of possible financial irregularities. (None was ever uncovered.) Bass was forced to take steep losses after Carlton Lutz, then an influential stock promoter, called RadiSys "the son of Intel" in his newsletter and the stock doubled. (More recently the company lost $58 million on revenue of $320 million in the 12 months ended Sept. 30.) "Even when you do great investigative work and you understand the accounting, it doesn't matter if you know everything," Bass says. "You can still lose a fortune."

Last spring Bass lost $110 million buying credit default swaps on Portugal, Ireland, Italy and Greece. He may have been right but too early. He is holding on.

His biggest potential score is in Japan. Government debt has soared to 190% of GDP from 50% in the mid-1990s, hitting an estimated $10 trillion in 2009. But because interest rates are so low, the government paid only 2.6% of GDP to service its debt in 2008, less than the U.S. at 2.9%.

Yet low rates mask a growing problem for Japan. The government took in $500 billion in taxes last year, plus another $100 billion in other revenue that included money borrowed by a government investment program. But the Tokyo feds spent $980 billion, including $100 billion-plus on interest and $190 billion or so it transferred to regional and municipal governments. That left a $360 billion hole it could plug only by writing more IOUs, on top of the debt it must roll over each year as bonds mature.

Today Japan can borrow all it wants from its own citizens. Over the decades they have dutifully (if mechanically) piled up a $7.7 trillion cache of savings they keep mostly in low-yielding bank deposits. Those savings equal two-thirds of the total household wealth of Germany, France and the U.K. combined, says John Richards, North American head of strategy at RBS, who spent the early 1990s in Japan trying to build a channel for selling Japanese government bonds overseas (the country still sells but 6% of its debt to foreigners). "You ask how would Japan turn into a sovereign debt crisis and you can't find the trigger," Richards says. "Shorting the yen because you think there's going to be a rollover crisis makes no sense at all."

The trigger could be demographics. Japan's population is aging quickly. Today 22% of Japanese are 65 or older; in 20 years it will rise to 30% or so (compared with a current 13% of Americans and 20% in 2030). At the same time Japan's total population peaked at 128 million in 2004 and has settled into long-term decline.

The Leverage Factor
Total U.S. debt, including banking liabilities, has soared relative to economic growth over the past 20 years.

The combination means Japan's government pension fund has become a net seller of government bonds, while the nation's savings rate has plunged from 18.4% in 1982 to 3.3% today. When that drops to zero, Japan will be forced to look overseas for financing--and risks exposing itself to international rates.

JPMorgan Chase analyst Masaaki Kanno in Tokyo says that Japanese bonds are in a bubble that could pop in the next three to five years, as savings rates drop. Even if the government can somehow keep borrowing at a 1.4% interest rate, he says, interest expense will rise to roughly $200 billion by 2019, or 45% of government revenue, unless it pushes through a big increase in the national value-added tax.

But those rates are unlikely to hold. For years the government has been able to replace bonds paying as much as 7% interest with steadily lower-rate debt. The favorable rollovers ended in 2007, leaving the government much more vulnerable if it has to sell debt overseas, where ten-year rates are two to three percentage points higher than Japan's. If rates rise past 3%--the scenario Bass is betting on--interest expense will exceed total government revenue by 2019.

The process will accelerate if the yen falls and interest rates rise, prompting Japanese savers to pull their money from low-yielding bank accounts, which, in turn, are invested in government bonds. "That will be the beginning of a vicious cycle," Kanno says, when "consumers will realize what is happening" and shift their money to more attractive investments overseas. Bass thinks the crisis will come sooner. For $6 million he has secured options on $12 billion in ten-year government bonds that will pay $125 million if Japanese rates rise to 4%.

"The good news is the wolf's at the door in Japan and that we in the U.S. have front row seats to see what's going to happen," he says. "I hope we learn something from it."

[Thucydides]

The contagion of debt spreads:

http://www.washingtonpost.com/wp-dyn/content/article/2010/02/21/AR2010022102914_pf.html

Greece and the welfare state in ruins

By Robert J. Samuelson
Monday, February 22, 2010; A15

It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues affecting hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency -- the euro. The meaning of Greece transcends high finance.

Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, disabled and aged. All welfare states face similar problems: burgeoning costs as populations age; an over-reliance on debt financing; and pressures to reduce borrowing that create pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil.

Greece is the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt -- basically, the sum of past annual deficits -- was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two-thirds of the debt is owed to foreigners, reports the Institute of International Finance.

The crisis originated in fears that Greece wouldn't be able to refinance almost 17 billion euros in bonds (about $23 billion) maturing this April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal and Ireland.

Preventing that is what the 16 euro countries, led by France and Germany, are debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. It would be rescued by the others. These expectations constituted an implicit guarantee of the debt of Greece and other euro countries. If Greece defaulted, the guarantee would vanish and, possibly, trigger a flight from other countries' debt.

But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand -- or require -- rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut its government workforce and raise taxes on alcohol, tobacco and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble.

To some economists, Greece's situation is so dire that default is inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen existing unemployment, already about 10 percent. "No sane country is going to accept that," says Lachman. Greece may get a temporary rescue, he thinks, but will someday miss debt payments and revert to its old currency: the "drachma."

Conceived as a way to unite Europe, the euro increasingly divides. No one wants Greece to default, but no one wants to pay the price of prevention. With its own currency, Lachman thinks, Greece would pursue depreciation to spur exports and economic revival. If other countries dump the euro, currency wars could ensue. The threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birth rate and rapidly graying population automatically increase old-age assistance even as the government tries to cut its spending. At issue is the viability of its present welfare state.

Almost every advanced country -- the United States, Britain, Germany, Italy, France, Japan, Belgium and others -- faces some combination of huge budget deficits, high debts, aging populations and political paralysis. It's an unstable mix. Present deficits may aid economic recovery, but the persistence of those deficits threatens long-term prosperity. The same unpleasant choices confronting Greece await most wealthy nations, even if they pretend otherwise.

[E.R. Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is a good analysis of the European economic problems by Timothy Garton Ash:

http://www.theglobeandmail.com/news/opinions/agonies-of-the-euro-zone/article1480148/

Agonies of the euro zone
This Greek tragedy is also a defining moment for the whole project of a European Union

Timothy Garton Ash

Thursday, Feb. 25, 2010

So Antigone had a part in this tragedy too. That's Antigone Loudiadis of Goldman Sachs, who arranged a complex currency swap deal that helped Greece conceal the scale of its debt as the country snuck into the euro zone. Pity Greece didn't consult someone as wise as Socrates; and I don't mean Jose Socrates, the Portuguese Prime Minister, whose own country the gods – that is, bond markets – are also eyeing leerily.

Joking apart, we need to recognize this is not just the first great test of the euro zone but also a defining moment for the whole project of a European Union. Since this is Europe, not Apollo 13, failure is definitely an option. More likely, however, is a muddling through, leaving the old and demographically aging continent even more preoccupied with its own internal problems. And the world will not wait while Europeans spend another decade navel-gazing. Call me Cassandra, if you will, but that's how I see it.

No special gift of prophecy was needed to foresee the dilemmas that now face the euro zone. They were extensively debated before it was launched. I wrote in 1998 that monetary union was “an unprecedented, high-risk gamble,” and argued that it was the wrong priority for Europe at that time. Subsequently, I was lulled into a false sense of security by the euro's apparent success, and by the practical and symbolic pleasures of travelling around the continent with just one currency in my pocket. Now we have the predicted difficulties. As George Soros observes, a “fully fledged” currency needs not just a central bank but also a treasury. It requires a degree of fiscal as well as monetary discipline, linked with the capacity to make fiscal transfers to suffering areas (complemented by labour mobility from those areas), as you have in a country like the United States or the United Kingdom.

To survive and prosper, a European monetary union must develop at least a stronger element of economic union, and that in turn requires a stronger element of political union. Which, by the way, was one of the main motives for some of the chief political architects of what was then deliberately called “economic and monetary union,” including François Mitterrand and Helmut Kohl. This was not just, as is often said, Europe putting the (monetary) cart before the (political) horse. It was an attempt to use the cart to bring on the horse. It was the last big fling of the so-called “functionalist” approach, by which you build a politically integrated Europe through economic integration. Broadly speaking, that worked for half a century, from the 1950s to the 1990s; but in this case, it has not.

By its mendacious and self-harming profligacy, Greece has precipitated the crunch. Greece is unique, even among the PIIGS (Portugal, Italy, Ireland, Greece, Spain), in its combination of massive deficit (an estimated 12.7 per cent of GDP last year) and massive debt (some 125 per cent of GDP and rising). It has not only lived beyond its means; it has used its years in the euro zone to become even less competitive.

Yesterday, the country was hit by the second general strike in two weeks, and we ain't seen nothing yet. Greece has promised its euro zone allies to get its deficit down from 12.7 per cent to 8.7 per cent this year. Oh yes, and pigs can fly. Even if the Greeks let their government do the right thing, such deep cuts, as well as structural reforms, can make things worse before they get better. Meanwhile, it seems the Greek government needs to borrow about €55-billion this year, up to half of it within the next three months. What if the gods (bond markets) grow angry and decline to play?

Well, that third act has not been written. Anything could happen. But my guess is this: through gritted teeth, Germany will agree to some form of euro zone bailout. However, it will only support the minimum needed to placate the gods, and only with the most astringent, Creon-like conditions being imposed on Greece. It is an important but ultimately secondary question whether this help comes in the form of bilateral loans, loans from the European Investment Bank, purchases of Greek government debt, EU spending transfers, jointly issued eurobonds or any of the other mechanisms suggested. EU leaders will deny that this is a bailout and everyone will know that it is a bailout.


Anthony Jenkins/The Globe and Mail

Both Greeks and Germans will then be furious. One well-placed diplomatic observer in Athens suggested to me that, as part of the European supervision of Greece's fiscal discipline, “there'll be a German under every desk.” Just don't mention the war. Except Greece's deputy prime minister, Theodoros Pangalos, already has. Recalling the Nazi occupation, he said this week: “They took away the gold that was in the Bank of Greece, they took away Greek money, and they never gave it back. This is an issue that has to be faced some time in the future.”

To which furious Germans will reply: “They took away our d-mark, and nobody asked us if we wanted to give it up. We were assured, in solemn treaties and rulings of our Constitutional Court, that we'd never have to bail anyone out. We took 10 years of painful reform to make ourselves competitive again, while those PIIGS lived high on the hog. Now we're being asked to work till age 67 so the Greeks can retire at 63.” And so on.

Euro zone Europeans are grown-up enough to get over this, but it will take a large toll of effort, anger and internal strains. In the long run, the crisis might even make the euro zone a little stronger, adding an element of what is carefully called “economic governance.” In the meantime, European economic growth is limping while Asians forge ahead. The always over-ambitious goal of the 2000 Lisbon Agenda, to make Europe the world's most competitive knowledge-based economy by 2010, looks ridiculous now, in 2010. And Europe's economic and political weakness compound each other.

Behind the monetary lurks the fiscal; behind the fiscal, the economic; behind the economic, the political; and behind the political, the historical. The deepest reality underlying this crisis is that the personal experiences and memories that have pushed European integration ahead for 65 years, since 1945, are losing their force. The personal memory of war, occupation, humiliation, European barbarism; fear of Germany, including Germany's fear of itself; the Soviet threat, the Cold War, the “return to Europe” as a guarantee of hard-won freedom; the hope of restored European greatness. These were massive biographical motivators that drove people like François Mitterrand and Helmut Kohl even unto the euro. Can Europeans go on building Europe without such profound motivators? Are there new ones in sight?

Timothy Garton Ash is professor of European studies at Oxford University.

There are lessons here for those, myself included, who advocate varying levels of increased North American union or creeping continentalism as I sometimes call it:

1.   Customs unions, like the original, pre-Euro, EU work – they grow the economies of all members, albeit at varying rates and with some stumbles. Canada and the USA are 95% of the way along to a customs union. The final step is to harmonize or, more likely, standardize how we treat the outside world in terms of tariffs and trade rules;

2.   Currency unions, à la the Eurozone, are much, much harder because, as described above, they require a higher degree of political integration than many are willing to accept;

3.   Lesser agreements on e.g. labour mobility and travel, perhaps even analogous to the Schengen Agreement are possible for countries that are already in a customs union but do not wish to form a currency union.
Both Canada and the USA have or are practicing ”mendacious and self-harming profligacy” à la Greece and the other PIIGS and it is unlikely that, in a currency union Canada could bail out the USA or the USA would bail out Canada. It is even more unlikely that either country would surrender the sort of political sovereignty (to some super-national body) necessary to make the two economies work as one and prevent the PIIGS problems.

Thus: Canada and the USA (but not Mexico) can and should, for their mutual economic benefit, proceed to a full customs union and make labour mobility and travel simple and easy – essentially by erasing the Canada/US border, rather than, as two less than smart administrations have tried, thickening it. (The US Department of Homeland Security is doing real, measurable harm to the US economic future. It is a hazard to the recovery which is as essential component of US security, in general. Homeland Security makes the USA less secure. Way to Go Janet Napolitano!)



Canada and the USA should not move towards a currency union because the two economies are too disparate, the relative size of strength of each is too different and there is neither a will nor a need for the necessary degree of political union.

[Thucydides]

Cashing in on the crisis?

http://www.dailymail.co.uk/news/worldnews/article-1253791/Is-man-broke-Bank-England-George-Soros-centre-hedge-funds-betting-crisis-hit-euro.html#

Man who broke the Bank of England, George Soros, 'at centre of hedge funds plot to cash in on fall of the euro'

By Karl West
Last updated at 8:52 AM on 27th February 2010
   
The man about to break the euro? George Soros is said to be placing large bearish bets against the single currency

A secretive group of Wall Street hedge fund bosses are said to be behind a plot to cash in on the decline of the euro.

Representatives of George Soros's investment business were among an all-star line up of Wall Street investors at an 'ideas dinner' at a private townhouse in Manhattan, according to reports.

A spokesman for Soros Fund Management said the legendary investor did not attend the dinner on February 8, but did not deny that his firm was represented.

At the dinner, the speculators are said to have argued that the euro is likely to plunge in value to parity with the dollar.

The single currency has been under enormous pressure because of Greece's debt crisis, plus financial worries in Portugal, Italy, Spain and Ireland.

But, it has also struggled because hedge funds have been placing huge bets on the currency's decline, which could make the speculators hundreds of millions of pounds.

The euro traded at $1.51 in December, but has since fallen to $1.34. Details of the secretive dinner emerged days after Mr Soros, chairman of Soros

Fund Management, warned in a newspaper article that the euro could 'fall apart' even if the European Union can agree a deal to shore up support for stricken Greece.

Mr Soros, who made more than $1billion by currency speculation when the pound was ejected from the Exchange Rate Mechanism on Black Wednesday in 1992, believes the structure of the euro is 'patently flawed'.

Hitting back: Greek PM George Papandreou blames 'speculators' for preying on the country's troubles

He said: 'Makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland.

'Together they constitute too large a portion of euroland to be helped in this way.'

He believes that unless the European Commission is given sweeping powers over taxation and spending, the single currency will always be vulnerable to financial turbulence in individual states.

'If member countries cannot take the next steps forward, the euro may fall apart,' he added.

Last night, Greek prime minister George Papandreou hit back at the 'speculators' who he blames for preying on the country's troubles.

Following a visit by EU economic inspectors and experts from the International Monetary Fund, he told the country's parliament that the worst fears about Greece's economy had been confirmed.

Greece is desperate to restore the confidence of investors in its debt after revealing that the previous government understated its budget deficit by half.

Outlining the precarious nature of Greece's finances, Mr Papandreou said: 'There is only one dilemma: Will we let the country go bankrupt or will we react?

'Will we let the speculators strangle us, or will we take our fate in our own hands?'

The Greek leader also called for more help from the EU with its debt crisis. Until now, the EU has offered political support but no bailout.

With friends like this: The cover of the German magazine 'Focus' this week, which shows the Venus de Milo giving the finger by a headline accusing Greece of swindling its way into the euro

Row: Greek daily Eleftheros Typos ran this depiction of the statue of the goddess Victoria, atop the Siegessaeule in Berlin, holding a swastika earlier this week in reaction to the Focus cover

But a row is still festering between Berlin and Athens over the crisis.
cabinet chancellery

Tight spot: German Chancellor Angela Merkel said the situation was 'difficult'

A Greek consumer group called for a boycott of German goods today after a German magazine blasted the country as 'cheats.

The new trade war came as Angela Merkel admitted the euro is in 'a difficult situation' for the first time.

She spoke as German magazine Focus ran a cover image of the armless Venus de Milo somehow raising her middle finger under the headline 'Cheats in the euro family' to suggest that Greece deliberately misled EU peers to swindle its way into the euro.

The cover sparked outrage in Greece, prompting the demands for a boycott. A Greek newspaper has also hit back, running an image showing the statue of the goddess Victoria atop the Siegessaeule in Berlin holding a swastika.

'The falsification of a statue of Greek history, beauty and civilisation, from a time when there (in Germany) they were eating bananas on trees is impermissible and unforgivable,' a statement from the Consumer Institute (INKA) said.

'Greeks are no crooks, we want the German government to condemn this most improper publication,' said INKA president George Lakouritis.

'If you have such friends, what do you need enemies for?'

INKA distributed leaflets in central Athens and in front of German-owned consumer electronics store Media Markt, urging Greeks to heed the boycott.

Merkel's government has so far deflected appeals to promise aid to heavily indebted Greece. Opinion polls show that a majority of Germans oppose a bailout.

Germany's ambassador to Greece, Wolfgang Schultheiss, said yesterday he regretted that German press reports caused offence. 'Germany is firmly on Greece's side,' Schultheiss said after being summoned by Greece's parliament speaker Filippos Petsalnikos.

But it wasn't enough for Mr Lakouritis. 'The ambassador's statements were not satisfactory,' he said.

Yesterday Mrs Merkel admitted that Greece's debt crisis has plunged the euro into a ‘difficult situation'.

The admission from the leader of Europe's biggest economy prompted fresh fears about the collapse of the single currency.

In the gravest sign yet of the international threat posed by Greece’s crippling debt crisis, Mrs Merkel warned for the first time that the eurozone faces a ‘ dangerous’ period.

[E.R. Campbell]

This reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site, illustrates a potential problem for the EU and the world:

http://www.theglobeandmail.com/report-on-business/economy/euro-in-most-difficult-phase-angela-merkel-says/article1484453/

Euro in ‘most difficult phase,' Angela Merkel says
‘At the roots are the high Greek deficits and lost credibility'

Berlin — Reuters and Globe and Mail

Sunday, Feb. 28, 2010

Europe's single currency project is facing its toughest period since its launch over a decade ago and it is essential that Greece tackle the roots of its troubles to restore confidence, German Chancellor Angela Merkel said Sunday.

In an interview with public television station ARD, Ms. Merkel also stressed that no decisions had been taken on providing financialassistance  to Greece, which is under acute pressure to reduce its debt mountain and bloated deficit.

“The euro is certainly in the most difficult phase since it was created,” Ms. Merkel told ARD in the interview. “And that's why it's so important that we're conscious of the fact that, on the one hand, it's our common currency but on the other hand of the need to really tackle the causes of the troubles at their roots,” she added.

“And at the roots are the high Greek deficits and lost credibility. That's why I'm very grateful that the Greek government is planning very couragous savings measures and other measures to improve the deficit situation.”

Ms. Merkel brushed aside media reports that the German government has been quietly setting aside provisions in its 2010 budget for possible aid to Greece.

“That is definitely not the case. We've got a treaty that does not include any provision for bailing states out, to help them out of a jam. We can best help Greece at the moment by making clear that Greece has to do its own homework, just like it is doing at the moment.”

She said the European Commission  was monitoring Greece to ensure it took the necessary steps and that no further decisions on aid had been taken.
“There have been absolutely no other decisions taken. I would like to say that quite clearly,” Ms. Merkel said. “Greece has to do what's necessary for Greece. But that is also important for all of us.”

Ms. Merkel repeated her view that the European Commission, European Central Bank and International Monetary Fund needed to endorse the Greek consolidation measures.

“I've also said that there have to be assurances now that the EU Commission, the ECB and the IMF are convinced that the Greek consolidation and savings programme is designed so that the problems are really solved,” Ms. Merkel said.

Her comments came after A Wall Street Journal report that Germany and France are leading a plan to put together an aid package for Greece worth up to €30-billion.

Separately, in Paris Sunday, French Economy Minister Christine Lagarde said she personally believed that derivatives on sovereign debt, such as credit default swaps (CDS), had to be either tightly regulated, limited or even banned.

CDS, which are used by investors to hedge against the risk of default by a borrower, together with other derivatives, have been the subject of mounting criticism as they may have helped conceal Greece's debt problems.

“I think that derivative products ... the CDS on sovereign debt have to be at least very, very regulated, rigorously regulated, limited or banned, this is a personal position on financial instruments,” Ms. Lagarde told Europe 1 radio.

Lagarde said she had no doubt Greece would be able to refinance its debt with the help of public, private funds or both.

There are a limited number of options for Greece, Europe and the international financial community – none of them very good.

In the longer term Europe must come to grips with its propensity to allow the PIIGS (Portugal, Ireland, Italy, Greece and Spain) to lie to the EU and get away with it. None of the five can be in the Eurozone under its own rules. Most should be expelled, even if they can bring their economies into line with the rules, because their governments are chronically dishonest and inept. There can be no case for making the Euro (€) a new, competitive reserve currency, or even for using SDRs that are heavily weighted with Euros, so long as the PIIGS remain € members.

Germany, France, the Netherlands and a few other respectable/responsible European governments need to sauve qui peut while there is still something, the € and the reasonably stable economies of North-West Europe, to be saved. The PIIGS should be "invited" to withdraw from the Eurozone (before they destroy it) as a precondition for massive help from the solvent members of the EU.

As an aside, the US debt:GDP ratio makes it a ‘pig,’ too, and adds fuel to China’s push to replace the $ with SDRs as the global reserve currency. The Chinese motive is not, totally, monetary/fiscal; China’s long term policy interests would be served by seeing the US humiliated by the world’s ‘rejection’ of the greenback.

[Thucydides]

Mark Steyn:

http://article.nationalreview.com/426405/when-responsibility-doesnt-pay/mark-steyn

When Responsibility Doesn’t Pay
Welfare always breeds contempt.

While Barack Obama was making his latest pitch for a brand-new, even-more-unsustainable entitlement at the health-care “summit,” thousands of Greeks took to the streets to riot. An enterprising cable network might have shown the two scenes on a continuous split-screen — because they’re part of the same story. It’s just that Greece is a little further along in the plot: They’re at the point where the canoe is about to plunge over the falls. America is farther upstream and can still pull for shore, but has decided instead that what it needs to do is catch up with the Greek canoe. Chapter One (the introduction of unsustainable entitlements) leads eventually to Chapter Twenty (total societal collapse): The Greeks are at Chapter Seventeen or Eighteen.

What’s happening in the developed world today isn’t so very hard to understand: The 20th-century Bismarckian welfare state has run out of people to stick it to. In America, the feckless, insatiable boobs in Washington, Sacramento, Albany, and elsewhere are screwing over our kids and grandkids. In Europe, they’ve reached the next stage in social-democratic evolution: There are no kids or grandkids to screw over. The United States has a fertility rate of around 2.1 — or just over two kids per couple. Greece has a fertility rate of about 1.3: Ten grandparents have six kids have four grandkids — ie, the family tree is upside down. Demographers call 1.3 “lowest-low” fertility — the point from which no society has ever recovered. And, compared to Spain and Italy, Greece has the least worst fertility rate in Mediterranean Europe.

So you can’t borrow against the future because, in the most basic sense, you don’t have one. Greeks in the public sector retire at 58, which sounds great. But, when ten grandparents have four grandchildren, who pays for you to spend the last third of your adult life loafing around?

By the way, you don’t have to go to Greece to experience Greek-style retirement: The Athenian “public service” of California has been metaphorically face down in the ouzo for a generation. Still, America as a whole is not yet Greece. A couple of years ago, when I wrote my book America Alone, I put the then–Social Security debate in a bit of perspective: On 2005 figures, projected public-pensions liabilities were expected to rise by 2040 to about 6.8 percent of GDP. In Greece, the figure was 25 percent: in other words, head for the hills, Armageddon outta here, The End. Since then, the situation has worsened in both countries. And really the comparison is academic: Whereas America still has a choice, Greece isn’t going to have a 2040 — not without a massive shot of Reality Juice.

Is that likely to happen? At such moments, I like to modify Gerald Ford. When seeking to ingratiate himself with conservative audiences, President Ford liked to say: “A government big enough to give you everything you want is big enough to take away everything you have.” Which is true enough. But there’s an intermediate stage: A government big enough to give you everything you want isn’t big enough to get you to give any of it back. That’s the point Greece is at. Its socialist government has been forced into supporting a package of austerity measures. The Greek people’s response is: Nuts to that. Public-sector workers have succeeded in redefining time itself: Every year, they receive 14 monthly payments. You do the math. And for about seven months’ work: For many of them, the work day ends at 2:30 p.m. And, when they retire, they get 14 monthly pension payments. In other words: Economic reality is not my problem. I want my benefits. And, if it bankrupts the entire state a generation from now, who cares as long as they keep the checks coming until I croak?

We hard-hearted small-government guys are often damned as selfish types who care nothing for the general welfare. But, as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government: Once a chap’s enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn’t give a hoot about the general societal interest; he’s got his, and to hell with everyone else. People’s sense of entitlement endures long after the entitlement has ceased to make sense.
The perfect spokesman for the entitlement mentality is the deputy prime minister of Greece. The European Union has concluded that the Greek government’s austerity measures are insufficient and, as a condition of bailout, has demanded something more robust. Greece is no longer a sovereign state: It’s General Motors, and the EU is Washington, and the Greek electorate is happy to play the part of the UAW — everything’s on the table except anything that would actually make a difference. In practice, because Spain, Portugal, Italy, and Ireland are also on the brink of the abyss, a “European” bailout will be paid for by Germany. So the aforementioned Greek deputy prime minister, Theodoros Pangalos, has denounced the conditions of the EU deal on the grounds that the Germans stole all the bullion from the Bank of Greece during the Second World War. Welfare always breeds contempt, in nations as much as inner-city housing projects: How dare you tell us how to live! Just give us your money and push off.

Unfortunately, Germany is no longer an economic powerhouse. As Angela Merkel pointed out a year ago, for Germany, an Obama-sized stimulus was out of the question simply because its foreign creditors know there are not enough young Germans around ever to repay it. Over 30 percent of German women are childless; among German university graduates, it’s over 40 percent. And for the ever-dwindling band of young Germans who make it out of the maternity ward, there’s precious little reason to stick around. Why be the last handsome blond lederhosen-clad Aryan lad working the late shift at the beer garden in order to prop up singlehandedly entire retirement homes? And that’s before the EU decides to add the Greeks to your burdens. Germans, who retire at 67, are now expected to sustain the unsustainable 14 monthly payments per year of Greeks who retire at 58.

Think of Greece as California: Every year an irresponsible and corrupt bureaucracy awards itself higher pay and better benefits paid for by an ever-shrinking wealth-generating class. And think of Germany as one of the less profligate, still-just-about-functioning corners of America such as my own state of New Hampshire: Responsibility doesn’t pay. You’ll wind up bailing out anyway. The problem is there are never enough of “the rich” to fund the entitlement state, because in the end it disincentivizes everything from wealth creation to self-reliance to the basic survival instinct, as represented by the fertility rate. In Greece, they’ve run out Greeks, so they’ll stick it to the Germans, like French farmers do. In Germany, the Germans have only been able to afford to subsidize French farming because they stick their defense tab to the Americans. And in America, Obama, Pelosi, and Reid are saying we need to paddle faster to catch up with the Greeks and Germans. What could go wrong?

— Mark Steyn, a NATIONAL REVIEW columnist, is author of America Alone. © 2010 Mark Steyn

[tomahawk6]

Some US analysts feel that the Greece and Spain's debt problems  could cause a collapse of the EU. Soros and a cabal of billionaires have already started to short the Euro,not good. The American public seems to have finally awoken to the fact that profligate spending is a huge threat to the US economy. Since the democrats are determined to collapse the economy that doesnt bode well for them in November. As a hedge against a falling dollar I have bought Loonies via FXC on the NYSE and I have bought into UUP a dollar hedge fund that cant print shares fast enough.

[Thucydides]

Comparison of Canada's banking system to the US:

http://american.com/archive/2010/february/due-north-canadas-marvelous-mortgage-and-banking-system

Due North: Canada’s Marvelous Mortgage and Banking System

By Mark J. Perry Friday, February 26, 2010

What about the Canadian banking system allowed it to survive the recent worldwide slowdown without a single bank failure? What can the United States learn from Canada about sound banking?

There were some significant differences between Canada and the United States during the recent financial crisis. In general, Canada’s banking system proved more prudent, more resilient, and much less prone to excesses. Taking a closer look at these differences might tell us how the United States got into the mess it is in, and illuminate some ideas for future reforms.

Consider, for example, some of the following facts, illustrated with charts.

Canada didn’t have nearly the real estate bubble and subsequent corrective crash in home prices as the United States:

 Bank2.A

Canada has had nowhere near the problems with mortgage delinquencies and home foreclosures as the United States:

Bank3.B

Yet Canadian banks remained profitable and reported positive return on equity even in the worst year of the meltdown, 2008, when U.S. banks (and banks in the United Kingdom and Europe) lost money and had negative returns on equity.

Banks1.B

These were some of the more interesting banking statistics present recently at the American Enterprise Institute’s seminar, “Canadian versus U.S. Housing Finance: Comparison and Implications,” organized by AEI resident fellow Alex Pollock.

And this recent financial crisis isn’t the first time that Canada’s banking system showed greater signs of stability and less exposure to stress than U.S. banks. In the 1930s, when 9,000 U.S. banks failed during the Great Depression, not a single bank in Canada failed. When almost 3,000 American banks failed during the Savings and Loan (S&L) Crisis, only two small Canadian banks failed in 1985, and those were the first bank failures in Canada since 1923. And while almost 200 U.S. banks have failed since the start of the global recession in early 2008, Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure.

    Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure.

What about the Canadian banking system allowed it to survive the recent worldwide slowdown, and even the Great Depression, without a single bank failure, and what can the United States learn from Canada about sound banking? Below is a summary of some of the distinctly different features of Canada’s banks and mortgage markets discussed at the AEI seminar, which help explain the greater financial stress resiliency of Canadian banks compared to American banks.

1. Full Recourse Mortgages in Canada. Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

    The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

2. Shorter-Term Fixed Rates in Canada. Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. This practice allows banks to achieve a better maturity match between their assets (mortgages and loans) and interest income, and their liabilities (deposits) and interest expense, which protects them from the kind of maturity mismatch and interest rate risk that resulted in our S&L crisis and almost 3,000 bank failures in the 1980s and 1990s.

3. Mortgage Insurance Is More Common in Canada than in the United States. About half of Canadian mortgages carry mortgage insurance (compared to 30 percent in the U.S. currently and only 15 percent before the crisis), primarily for those mortgages financing the purchase of a home with less than a 20 percent down payment, and the borrower is required to pay the full mortgage insurance premium upfront. Another difference from the U.S. is that when private insurance companies in Canada insure mortgages, they have the authority to approve or reject the property appraisal, and they have strong financial incentives to only approve realistic property appraisals. Mortgage insurance in Canada covers the full loan amount for the full life of the mortgage, and cannot be eliminated like in the United States when the property value exceeds the mortgage balance. The traditionally much higher frequency of mortgage insurance in Canada compared to the United States helps to stabilize Canada’s mortgage and housing markets, and is one of the many features that contribute to its ranking as the safest banking system in the world.

    Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the U.S.) holding more than 80 percent of total bank assets.

4. No Tax Deductibility of Mortgage Interest in Canada. Home mortgage interest has never been tax-deductible in Canada, so there is no tax advantage to home ownership in Canada over renting. There is also no tax benefit to converting home equity into household debt in Canada, which has resulted in a much greater equity accumulation in Canada (70 percent of total real estate value) than in the United States (currently only about 45 percent). Also, paying down your mortgage in Canada is a tax-free investment and further encourages greater equity accumulation than in the United States. Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the United States (67.2 percent).

5. Higher Prepayment Penalties in Canada. Prepaying mortgages in Canada is allowed, but there are much stiffer prepayment penalties (three months of mortgage interest) than in the United States, which discourages the kind of refinancing that frequently took place in the United States leading up to the housing meltdown, and often involved pulling home equity out in the refinancing process (encouraged by the tax deductibility of mortgage interest).

    Home mortgage interest has never been tax-deductible in Canada.

6. Public Policy Differences for Low-Income Housing. To promote affordable housing for low-income households, the Canadian government has not used public policies like the Community Reinvestment Act in the United States, which encouraged homeownership for lower-income and less creditworthy borrowers, financed frequently with subprime mortgages. Instead, the Canadian government provides public funding for low-income rental housing, rather than encouraging homeownership for low-income households, and Canada has thus avoided the American mistake of using misguided policies to turn good, low-income renters into bad homeowners.

7. Differences in Canada’s Bank Concentration and Greater Diversification. Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the United States) holding more than 80 percent of total bank assets. This concentration became an advantage during the recent financial crisis because it facilitated critical discussions among the five large banks and the single federal regulator (the Office of the Superintendent of Financial Institutions). Also, Canada has never had branching restrictions like the U.S. laws that prevented interstate banking up until 1994, and this has historically allowed Canadian banks to achieve geographical diversification for their deposits and loans portfolios. It was largely this difference in geographical diversification that help explains why the United States had 9,000 bank failures during the Great Depression (each operating within only one of the 48 states, due to the prohibition on interstate branching) and not a single Canadian bank (all with branches nationwide) failed in the 1930s.

    Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the U.S. (67.2 percent).

8. A Few Other Differences that Contribute to Bank Safety in Canada. There is a much lower rate of loan originations by mortgage brokers in Canada (only 35 percent) than in the U.S. (70 percent), far less mortgage securitization in Canada than here, and a much smaller subprime mortgage market. Banks in Canada keep and service 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk. Finally, almost all mortgage payments in Canada are made electronically by an automatic payment arrangement, which minimizes late payments.

Bottom Line: Taken together, the features and regulations of banks in Canada outlined above create a healthy and sound “pro-lender” environment absent of political motivations for outcomes like greater homeownership, compared to the often politically motivated “pro-borrower” and “pro-homeowner” policies of the United States. While Canada’s banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with homeownership.

Canada’s banks are generally ranked as the safest and soundest in the world, and their non-politicized banking system could provide a model for banking reform in the United States. Moving towards the Canadian banking system could go a long way towards stabilizing our mortgage, credit, and housing markets and make us less vulnerable to financial shocks in the future.

Mark J. Perry is a professor of economics in the School of Management at the Flint campus of the University of Michigan, and a visiting scholar at the American Enterprise Institute.

[E.R. Campbell]

Yet more dark clouds on the European horizon, according to this article from The New York Times News Service, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail:

http://www.theglobeandmail.com/report-on-business/economy/britain-grapples-with-debt-of-greek-proportions/article1488285/

Britain grapples with debt of Greek proportions
‘If you really want a fiscal problem, look at the U.K.'

Landon Thomas Jr.

London — The New York Times News Service

Published on Wednesday, Mar. 03, 2010

As Greece's debt troubles batter the euro, Britain has done its utmost to stay above the fray.

Until now, that is. Suddenly, investors are asking if Britain may soon face its own sovereign debt crisis if the government fails to slash its growing budget deficits quickly enough to escape the contagious fears of financial markets.

The pound fell Tuesday to its lowest level against the dollar in nearly 10 months. The yield on 10-year government bonds, known as gilts, slid as investors fretted that Parliament would be too fragmented after a crucial election in May to whip Britain's messy finances back into shape.

The slide in the pound followed a sharper decline Monday after polls released over the weekend indicated that the opposition Conservatives had lost their clear lead in the election race.

Without a strong political majority to tackle Britain's lumbering fiscal problems, investors could start to make it greatly more expensive for the government to raise funds, setting the stage for a potential double-dip recession, if not worse.

“If you really want a fiscal problem, look at the U.K.,” said Mark Schofield, a fixed-income strategist at Citigroup. “In Europe, the average deficit is about 6 per cent of GDP and in the U.K. it's 12 per cent. It is only just beginning.”

Since the Labour government's intense fiscal intervention in 2008 and 2009, yields on British government debt have soared to among the highest in Europe. And on a broader scale, which includes the borrowing of households and companies, the overall level of debt in Britain is the second-largest in the world, after Japan's, at 380 per cent of the country's gross domestic product, according to a recent report by the consulting company McKinsey.

In recent weeks, the focus has been on debt scofflaws in Europe like Greece, Portugal and Spain, countries where borrowing costs have shot up in line with their growing deficits as investors demanded higher rates to compensate them for the added risk of lending the governments money.

But the recent plunge in the value of the pound below $1.50 and the gradual move upward of Britain's benchmark 10-year borrowing rate on gilts to above 4 per cent suggest that investors are now getting ready to reassess the country's fiscal condition.

Britain is not in the 16-nation euro zone and, unlike Greece and other struggling countries that use the currency, it retains control over its monetary policy. As a result, it has benefited so far from a huge bond-buying program undertaken by the Bank of England  - proportionally, the largest in the world - that has kept mortgage rates and gilt yields at unusually low levels. That means the government and its citizens have been able to continue to borrow at interest rates that do not reflect their true financial situation.
Indeed, the increase in private and government debt here contrasts sharply with the deleveraging that has been going on in the United States.

British household debt is now 170 per cent of overall annual income, compared with 130 per cent in the United States. In an echo of America's rush into subprime mortgages with low teaser rates, millions of homeowners in Britain have piled into variable-rate mortgages that are linked to the rock-bottom base rate.

As for the British government, it has been able to finance a budget deficit of 12.5 per cent of GDP - equal to Greece's - at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.

“It's not just ‘basket cases' like Greece that can be considered candidates for sovereign crises,” said Simon White of Variant Perception, a research house in London that caters to hedge funds and wealthy individuals. “Gilts and sterling will continue to come under pressure as scrutiny of the U.K. fiscal situation intensifies.”

Adding to this concern is the precarious condition of the British consumer. As interest rates  have hit new lows, the popularity of variable-rate loans has grown. At the end of December, 40 per cent of new mortgages were tracking the government's base rate.
Despite comments from Mervyn King, the governor of the Bank of England, that he might restart his quantitative easing program in light of current economic weakness, the view among investors is growing that interest rates here will rise further, along with higher inflation and Britain's increased risk profile.

In a speech this year, Andrew Haldane, the executive director of financial stability at the Bank of England, warned about how vulnerable Britain was to a rate increase, pointing out that an increase of one percentage point would cause debt service costs relative to income to double, to 13 per cent.

“This is a ticking time bomb,” said Nick Hopkinson of Property Portfolio Rescue, a company that assists overleveraged homeowners. “There are over 400,000 people who are in arrears with their mortgage rates the cheapest they have ever been. When rates increase, a lot of people will be tipped over the edge.”

As a result, those counting on the British consumer to take up the slack from any scaling back of government borrowing could be in for a shock.

Consider Sheridan King, a sales manager who is struggling to pay off his £32,000 in nonmortgage debt. Far from thinking about going shopping, his first priority is keeping clear of his creditors. And even though his variable mortgage of about £100,000 carries a very low rate, interest costs are already chewing up a substantial portion of his pay, and he is deeply worried about the future. “If rates go up, it will be a very dangerous situation for me,” Mr. King said. “It might lead me to consider bankruptcy.”

For the time being, at least, the British government faces no such threat.

Despite its borrowing and spending excesses, Britain still maintains a triple-A credit rating and much of its debt is long term. But with 29 per cent of British bonds held by foreigners, Britain, like Greece, remains highly vulnerable to the vicissitudes of outside investors.

Since early this year, foreign holdings of British bonds have fallen from 35 per cent, a trend that has tracked the pound's decline and contributed to the increase in the yield on its 10-year gilts.

As to which political party he thinks is best placed to handle these challenges, Mr. King takes a skeptical view.

“We are just struggling to get by with all this debt,” he said. “It's time the government got its house in order.”

I agree with Mark Schofield, a fixed-income strategist at Citigroup, that Britain has a serious fiscal problem; crisis is not too strong a word, just like the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and just like France and several other European countries …

.
.
.
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... and just like America, too.

Canada is not immune to all this: these nations with fiscal crises are our major markets and trading partners; they buy our resources and products and invest in our economy. About the best we can do is to defend ourselves by containing (or restraining) some necessary spending, like defence spending and transfers to provinces for healthcare, and by cutting most spending, including that which is very popular amongst many, many Canadians.

[Thucydides]

A look at how Canada stacks up against other nations in terms of debt:

[Thucydides]

So what happens when everyone starts to default on their obligations?

http://www.nytimes.com/2010/03/06/world/europe/06iceland.html?partner=rss&emc=rss&pagewanted=print

Iceland Voters Set to Reject Debt Deal
By SARAH LYALL

REYKJAVIK, Iceland — After the dust began to settle last year — after the banks failed, the currency collapsed, the stock market crashed and the government fell — the dazed inhabitants of Iceland woke up to another unpleasant problem: They owed, it seemed, some $5.3 billion to more than 300,000 angry people in the Netherlands and Britain.

These were the customers of Icesave, a now notorious online retail branch of the Icelandic bank Landsbanki, which went bankrupt in October 2008 along with 85 percent of Iceland’s banking system. The British and Dutch governments reimbursed their citizens, but then demanded that Iceland repay the money, the equivalent of $65,000 per household here, plus interest.

To put it in perspective, it is as if American taxpayers were being forced to pay $5 trillion (plus interest) to reimburse customers of the Japanese branch of a failed private American bank, said Magnus Arni Skulason, the head of InDefence, a group agitating for a better deal.

The question of how to pay has convulsed this tiny country of about 319,000 people, severely damaging its international reputation and paralyzing its economic recovery. It has so incensed its residents that on Saturday they are expected to reject overwhelmingly the latest Icesave repayment plan, in the first national referendum ever held here on any subject.

The vote raises larger questions about Iceland’s place in the world, said Silja B. Omarsdottir, a political scientist at the University of Iceland. “Are we going to be a country that takes our obligations seriously? Or are we going to say, ‘No, we’re going to do things our way’ and be an international pariah?”

In the scheme of world debt, $5.3 billion is small potatoes. But it represents more than 40 percent of Iceland’s gross domestic product. The interest alone would eat up one-fourth of the country’s revenues, said Prime Minister Johanna Sigurdardottir, who called finding a resolution to the Icesave dispute “a matter of life and death for the Icelandic economy.”

The referendum was prompted on Jan. 5 by the refusal of Iceland’s president, Olafur Ragnar Grimsson, to sign into law the latest Icesave agreement, arrived at after months of bad-tempered negotiations with Britain and the Netherlands and narrowly passed by a divided and fractious Icelandic Parliament.

Mr. Grimsson’s move was unexpected but widely popular in a place that feels bullied and ill treated.

The crisis spurred a series of demonstrations from usually phlegmatic Icelanders, who recited poetry and tossed yogurt pots and rocks at government buildings to protest what they deemed the greed, ineptitude and spinelessness of the governing elite. Nearly a quarter of the electorate signed an Internet petition against the Icesave deal.

The referendum is being closely watched abroad, where the worry is that people in other financially flailing countries might be emboldened to rise up and refuse to honor financial obligations stemming from the failures of their banks.

But absurdities abound. For one thing, Icesave negotiations have moved on since January, so the deal being voted on — which would give Iceland 15 years to repay the money, at 5.5 percent interest — is not the deal currently on the table. For another thing, many Icelanders appear to believe that they are voting not on the terms of the plan, but on whether to pay at all.

Not only that, Ms. Sigurdardottir said, further delays are likely to eat up any savings that might come if all the parties finally agree to a better deal. Iceland has promised to pay up to 20,887 euros per customer (more than $28,000 each), in accordance with European deposit-guarantee regulations, but negotiations are now stalled by arguments over interest rates.

Birgitta Jonsdottir, a member of Parliament from the fledgling people-power Civic Movement Party, said that a “no” vote would send a strong message to the world.

First, she said, “We don’t believe in the socialization of private debt.” Second: “It is time for Britain to treat us like a sovereign nation and not a colony.” And third: “They can’t use the I.M.F. to blackmail us into doing what they want on Icesave.”

But it seems they can.

The I.M.F. and a coalition of Nordic countries have delayed the second installment of a $4.85 billion bailout package for Iceland pending the outcome of the Icesave dispute. The rating agency Fitch recently downgraded Iceland’s credit rating to below investment grade, and Moody’s and Standard & Poor’s both warned that the political and financial turmoil expected to follow if the deal was rejected might make them follow suit.

Britain is also threatening to hold up Iceland’s entry to the European Union.

A “no” vote “would effectively be saying that Iceland doesn’t want to be part of the international financial system,” Lord Myners, financial services secretary to Britain’s treasury, warned in January.

That some Icelanders seem willing to take the consequences — to risk becoming “the Cuba of the north,” in the words of Mr. Skulason — speaks to an element embedded deep in the national character. The symbol of this is Bjartur, the protagonist of Iceland’s most celebrated work of fiction, “Independent People,” by Halldor Laxness (who is also the only person here to have won a Nobel Prize).

Bjartur, a sheep farmer, struggles through one disaster after another to survive in the punishing Icelandic countryside and pay off his mortgage.

“He represents the Icelandic soul,” said Ms. Omarsdottir, the political scientist. “He’d rather have his kids starve, his wife die — his two wives die — and his cow die, and lose almost all of his sheep, than be beholden to anyone.”

Iceland’s economy is all but stalled as everyone waits for a resolution. Businesses cannot get loans. Foreign currency movement is severely restricted. Unemployment has increased to about 8 percent from less than 1 percent. The economy contracted by 7 percent last year.

Iceland’s three McDonald’s outlets closed in October, saying that they were losing money because of the collapse of Iceland’s currency, the krona, and that to make a profit, they would have had to charge $6.36 for a Big Mac.

Many Icelanders see Saturday’s vote as an expression of outrage not just against foreign interference but also against Icelandic bankers. These were the so-called Vikings who at the height of the boom ran wild around the world making complicated, house-of-cards deals and encouraging a once prudent population to buy bigger houses and fancy cars in foreign currency.

Iceland has foreign debts of $1.36 billion that mature at the end of 2011. No one is predicting, yet, that it could default on those loans, but delays in Icesave will not help matters.

“In the worst case, in 20 years we will be like Cuba, with lots of old cars,” Elisabet Run Sigurdardottir, 22, a student, said in a downtown coffee shop the other day.

She was joking, mostly. “Only our old cars will be Range Rovers.”

[E.R. Campbell]

I know that almost no one, except me, cares about all this, but we all should because guys like Olivier Blanchard want to debase our currencies and impoverish us and our children and grandchildren so that a few bureaucrats can manage the global economy:

http://network.nationalpost.com/NP/blogs/fullcomment/archive/2010/03/08/terence-corcoran-macroimprudential-monetary-policy.aspx

Macroimprudential monetary policy

March 08, 2010

Should inflation be deliberately pushed up to 4%? This destructive idea is sweeping financial markets. Canada beware. 

By Terence Corcoran

For some time now global economic theory has been more or less settled on the idea that the best inflation rate is low inflation, at least 2% or possibly even zero. But now, suddenly, the financial world is bristling with the idea that in these troubled times the world economy needs a fresh approach to inflation, even a new target range of, say, 4%.


The source of this proposal is the International Monetary Fund, home of the world’s greatest noodlers on how to impose a sweeping new era of global macroprudential economic regulation aimed at avoiding future economic crises. Few people thought that what the world needed to create economic stability was a steady stream of destabilizing inflation, but now that the IMF has unleashed the idea it has been slowly traveling through the lower reaches of the economic theocracies and is now making its way into the capital markets as a serious policy alternative.


This impausible debate hasn’t yet reached Canada yet, where the Bank of Canada is formally committed to 2% inflation. But if the idea that higher inflation is good policy should gain traction elsewhere in this crazy new Keynesian world, Canadian monetary policy—not to mention the Canadian dollar, fiscal policies and investment strategies—would be thrown for a loop, which is economic jargon for shock and chaos. Do you like your Canadian dollar at US$1.15 or US$1.25?


It all began a month ago when Olivier Blanchard, chief economist of at the IMF, co-authored a paper, Rethinking Macroeconomic Policy, in which he and two colleagues mused about the possible benefits of a deliberately high-inflation policy. The paper mentioned 4% as a specific target, a shocking number in itself. Two European bankers, Alex Weber and Philipp Hildebrand, tackled the Blanchard proposal in a recent Wall Street Journal commentary. As they put it, the IMF’s chief economist is promoting a monetary illusion.


The destructive potential and risks associated with a deliberate unleashing of 4% inflation are alarming enough—money loses half its value every 10 years, robbing citizens and distorting economic calculation. High inflation also threatens currency and price shocks across the global economy. These are grounds enough for rejecting the idea. But there are other equally powerful arguments against the Blanchard inflation regime, arguments embedded in the IMF paper.


A core rationale in the paper is that a high inflation regime opens the door to a new regulatory regime, one that involves a major expansion of government control over a wide range of economic activities.

The paper begins with the obvious statement that there are limits to fiscal policy and the use of government spending to stimulate economic activity in times of crisis. At low inflation rates, there also appear to be limits to monetary policy. Once interest rates have been set close to zero, as they are today in many countries, the impact of monetary policy is also limited. If the inflation target were 4%, then nominal interest rates would today be higher, and that would make it possible for the world’s central banks to cut interest rates in times of crisis. “As a matter of logic,” said Mr. Blanchard, “higher average inflation and thus higher average nominal interest rates before the crisis would have given more room for monetary policy to be eased during the crisis and would have resulted in less deterioration in fiscal positions. “


What we need to think about now, said Mr. Blanchard, is whether this could justify setting a higher inflation target in the future. If nominal  interest rates were at 6% and inflation at 4% then the economy could be stimulated with central banks pushing rates.


But what Mr. Blanchard really wants is an ongoing excuse to expand the role of government. If the inflation he proposes distorts markets, then it is the role of government to intervent to manipulate the markets to avoid and neutralize those distortions. The list of regulatory interventions needed to offset inflation soon becomes vast under Mr. Blanchard’s proposals.


New regulation and “instruments” would have to be brought in to manage bubbles and asset surges, recalibrate systemic risks, and fine-tune economic activity through any number of shocks.


He calls them “cyclical regulatory tools.” For example, if leverage appears excessive in the markets, regulatory capital ratios can be increased. If liquidity appears to low, regulatory liquidity ratios can be introduced.  If house prices rise, loan-to-capial ratios can be decreased. To limit stock price increases, margin requirements can be increases. The tax system would also have to be rejigged to take account of inflation in capital gains and bracket creep. What about wage indexation and its ability to send inflation soaring? Mr. Blanchard stopped short of price controls, although it is hard to know why they were left out of his calculus.


The questions in Mr. Blanchard’s paper seem familiar. “Should policy makers therefor aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to reach to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4% than at 2%, the current target range? Is it more difficult to anchor expectations at 4% than at 2%?”


These are questions long thought to have been answered. But in the new world of macroprudential regulation, they apparently must now all be answered anew.

Blanchard is proposing macroeconomic rubbish but Europe (France, in particular) has long been the source of a huge, pent up desire to disable the free market and impose state controls on everyone and everything.

[Old Sweat]

Cripes, this is scary stuff. High (or moderate) inflation has a certain allure for the big government types. It reduces annual deficits in real terms as time goes on, as the annual repayments are effectively reduced year over year. This was the kind of loopy thinking that drove Canadian officialdom in the late seventies and early eighties, and nearly reduced us to third world status.

It is nothing but a massive ponzi scheme.

[Kirkhill]

Some others do care about this stuff.

I think that its kind of late to be worrying about inflationary targets.  IMHO inflation has been an implicit goal of the IMF at least since the seventies.  They may have turned the heat down a little in the 80s and 90s to a 2-3% level after discovering that the markets, and politics, couldn't cope with 10-20% levels, but ultimately the intent is to redistribute the wealth. 

Print more dollars, euros, carbon credits ..... whatever, and thus debase the holdings of the "rich" while concurrently putting scrip in the hands of those that didn't have it before and making them forever grateful to Government and the State for putting shoes on their feet and making the trains run on time.

Real value is still reckoned in Gold Sovereigns and Silver Dollars per Barrel of Oil.

[Thucydides]

Impoverishing the poor is the end result of inflation, so this creates an underclass that is susceptible to demagogues and political manipulation.

Sadly the only real way to end inflation may be to go back to the system of "free banking" (where individual banks  have the power to create or deflate the money supply based on their holdings of real wealth and financial assets) rather than allow governments to create money through the central bank. This will probably not happen in an orderly fashion but only as a result of an inflationary or hyper-inflationary collapse.

[Thucydides]

Looking at this mountain of debt, default is starting to look like the only rational option after all:

http://www.sortofpolitical.com/2010/03/nothing-like-little-bit-of-perspective.html

Nothing like a little bit of perspective...

CNBC has a list up that definitely puts Canada's federal deficit and debt into perspective: The World's Biggest Debtor Nations

To be clear, I'm no advocate of deficit spending or debt financing by governments. However, some times it's unavoidable.

That said, Canada's external debt as a percentage of GDP, roughly 60% , isn't even anywhere near being in the same league as the following! Not even remotely close! And correct me if I'm wrong, but I think it's worth noting that most of this list is made up of left leaning quasi-socialist states.

External debt as a percentage of GDP...

20. United States
External debt (as % of GDP): 95.9%
Gross external debt: $13.67 trillion (2009 Q3)
2009 GDP (est): $14.25 trillion

19. Australia
External debt (as % of GDP): 108.8%
Gross external debt: $891.26 billion (2009 Q2)
2009 GDP (est): $819 billion

18. Hungary
External debt (as % of GDP): 124.2%
Gross external debt: $231.33 billion (2009 Q2)
2009 GDP (est): $186.3 billion

17. Italy
External debt (as % of GDP): 154.6%
Gross external debt: $2.71 trillion (2009 Q3)
2009 GDP (est): $1.76 trillion

16. Greece
External debt (as % of GDP): 175.3%
Gross external debt: $594.60 billion (2009 Q3)
2009 GDP (est): $339.2 billion

15. Spain
External debt (as % of GDP): 184.7%
Gross external debt: $2.53 trillion (2009 Q3)
2009 GDP (est): $1.37 trillion

14. Germany
External debt (as % of GDP): 189.4%
Gross external debt: $5.33 trillion (2009 Q3)
2009 GDP (est): $2.81 trillion

13. Finland
External debt (as % of GDP): 205.7%
Gross external debt: $376.8 billion (2009 Q3)
2009 GDP (est): $183.1 billion

12. Norway
External debt (as % of GDP): 208.9%
Gross external debt: $577.80 billion (2009 Q3)
2009 GDP (est): $276.5 billion

11. Hong Kong
External debt (as % of GDP): 218.8%
Gross external debt: $659.27 billion (2009 Q3)
2009 GDP (est): $301.3 billion

10. Portugal
External debt (as % of GDP): 231.5%
Gross external debt: $538.1 billion (2009 Q3)
2009 GDP (est): $232.4 billion

9. France
External debt (as % of GDP): 247.2%
Gross external debt: $5.22 trillion (2009 Q3)
2009 GDP (est): $2.11 trillion

8. Austria
External debt (as % of GDP): 268.9%
Gross external debt: $869.13 billion (2009 Q3)
2009 GDP (est): $323.2 billion

7. Sweden
External debt (as % of GDP): 275%
Gross external debt: $916.42 billion (2009 Q3)
2009 GDP (est): $333.2 billion

6. Denmark
External debt (as % of GDP): 315.2%
Gross external debt: $627.6 billion (2009 Q3)
2009 GDP (est): $199.1 billion

5. Belgium
External debt (as % of GDP): 345.6%
Gross external debt: $1.32 trillion (2009 Q3)
2009 GDP (est): $381.4 billion

4. Switzerland
External debt (as % of GDP): 390%
Gross external debt: $1.23 trillion (2009 Q3)
2009 GDP (est): $316.1 billion

3. Netherlands
External debt (as % of GDP): 395.6%
Gross external debt: $2.58 trillion (2009 Q3)
2009 GDP (est): $652 billion

2. United Kingdom
External debt (as % of GDP): 427.6%
Gross external debt: $9.26 trillion (2009 Q3)
2009 GDP (est): $2.17 trillion

1. Ireland
External debt (as % of GDP): 1,352%
Gross external debt: $2.39 trillion (2009 Q3)
2009 GDP (est): $177.3 billion

Can we say, "YIKES!!!"

[Thucydides]

More on popping bubbles:

http://baselinescenario.com/2010/03/11/the-coming-greek-debt-bubble/

The Coming Greek Debt Bubble

By Peter Boone and Simon Johnson

Bubbles are back as a topic of serious discussion, as they were before the financial crisis.  The questions are: (1) can you spot bubbles, (2) can policymakers do anything to deflate them gently, and (3) can anyone make money when bubbles get out of control?

Our answers are: Spotting pure equity bubbles may sometimes be hard, but we can always see unsustainable finances supported by cheap credit.  But policymakers will not act because all great (and dangerous) bubbles build their own political support; bubbles are invincible, until they collapse.  A few investors can do well by betting against such bubbles, but it’s harder than you might think because you have to get the timing right – and that’s much more about luck than skill.

Bubbles are usually associated with runaway real estate prices (think Japan in the 1980s and the US more recently) or emerging market booms (parts of Asia in the 1990s and, some begin to argue, China today) or just the stock market gone mad (remember pets.com?)  But they are a much more general phenomenon – any time the actual market value for any asset diverges from a reasonable estimate of its “fundamental” value.

To think about this more specifically, consider the case of Greece today.  It might seem odd to suggest there is a bubble in a country so evidently under financial pressure – and working hard to stave off collapse with the help of its neighbors – but the important thing about bubbles is: Don’t listen to the “market color” (otherwise known as ex post rationalization), just look at the numbers.

By the end of 2011 Greece’s debt will around 150% of GDP (the numbers here are based on the 2009 IMF Article IV assessment; we make some adjustments for the worsening economy and the restating of numbers since that time – for example, the fiscal deficit in 2009 will likely turn out to be about 8 percent, which is double what the IMF expected until recently).  About 80 percent of this debt is foreign owned, and a large part of this is thought held by residents of France and Germany.  Every 1 percentage point rise in interest rates means Greece needs to send an additional 1.2 percent of GDP abroad to those bondholders.

What if Greek interest rates rise to, say, 10% – a modest premium for a country which has the highest external public debt/GDP ratio in the world, which continues (under the so-called “austerity” program) to refinance even the interest on that debt without actually paying a centime out of its own pocket, and which is struggling to establish any sustained backing from the rest of Europe?  Greece would need to send at total of 12% of GDP abroad per year, once they rollover the existing stock of debt to these new rates (nearly half of Greek debt will roll over within 3 years).

This is simply impossible and unheard of for any long period of history.  German reparation payments were 2.4 percent of GNP during 1925-32, and in the years immediately after 1982, the net transfer of resources from Latin America was 3.5 percent of GDP (a fifth of its export earnings).  Neither of these were good experiences.

On top of all this Greece’s debt, even under the IMF’s mild assumptions, is on a non-convergent path even with the perceived “austerity” measures.  Bubble math is easy.  Hide all the names and just look at the numbers.  If debt looks like it will explode as a percent of GDP, then a spectacular collapse is in the cards.

Seen in this comparative perspective, Greece is bankrupt today without a great deal more European assistance or without a much more drastic austerity program. Probably they need both.

Given there’s a definite bubble in Greek debt, should we expect European politicians to help deflate this gradually?  Definitely not – in fact, it is their misleading statements, supported in recent days (astonishingly) by the head of the International Monetary Fund, that keep the debt bubble going and set us all up for a greater crash later.

The French and Germans are apparently actually encouraging banks, pension funds, and individuals to buy these bonds – despite the fact senior politicians must surely know this is a Ponzi scheme, i.e., people can get out of Greek bonds only to the extent that new investors come in.  At best, this does nothing more than postpone the crisis – in the business, it is known as “kicking the can down the road.”  At worst, it encourages less informed people (including perhaps pension funds) to buy bonds as smarter people (and big banks, surely) take the opportunity to exit.

While the French and German leadership makes a great spectacle of wanting to end speculation, in fact they are instead encouraging it.  The hypocrisy is horrifying – Mr. Sarkozy and Ms. Merkel are helping realistic speculators make money on the backs of those who take seriously misleading statements by European politicians.  This is irresponsible.

What should be done?

1.  The Greeks and the Europeans must decide:  do they want to keep the euro, or not.

2.  If they want to keep the euro in Greece, the Greeks need to come up with realistic plan to start paying back debt soon.  Any Greek plan will not be credible for the first few years, so the Europeans must finance the Greeks fully. This does not mean 20bn euros, it means making available around 180bn euros – i.e., the full amount of refinancing that Greece needs during this period.

3.  If they don’t want to keep the euro then they should start working now on a plan for Greece’s withdrawal.  The northern Europeans will need to bail out their own banks, because Greek debt must fall substantially in value – euro denominated debt will need to be written down substantially or converted to drachmas so it will be partially inflated away.   The Greeks can convert local contracts, and deposits at banks, into drachma.  It will be a very messy, difficult transition, but the more the debt bubble persists, the more attractive this becomes as a “least awful” solution.

Regardless of the decision on whether Greece will keep the drachma or give it up , the IMF should be brought in to conduct the monitoring and burden share.  The Europeans flagrant deception which we now observe – claiming the Greeks have made a big step and encouraging people to buy Greek bonds – proves they do not have the political capacity to be realistic about this situation.  Who can now be believed on needs for Greek financial reform and what is truly a credible response?  The only credible voice left with the capacity to act is the IMF – and even the Fund risks being compromised by the indiscreet statements of its top leadership as the bubble continues.

If such measures are not taken, we are clearly heading for a train wreck.  The European politicians have been tested, and now we know the results:  They are not careful, they are reckless.

My big question is how would anyone not named George Soros make any money off this? (Imagine an Army.ca pool investing in means of cashing in on the deflating bubbles of Greek, PIIGS, Japanese or other heavily indebted nations debt obligations...)

[Thucydides]

And more on foreign debt holdings:

http://corner.nationalreview.com/post/?q=ODMyM2YzYjk1YzI4ZGNkNjYxNDQyMTk2ZmEyNmM4Zjg=

Is Foreign Ownership of Our Debt a Threat to the U.S.? 
 [Veronique de Rugy]

This is the question that economist Bruce Bartlett asks this morning over at Forbes. As with all his articles, Bartlett tackles an interesting issue. It's one where people have many preconceptions that are incorrect. As always, he does a terrific job at explaining the problem and its implications (especially since this time he refrains for saying that the only solution to our fiscal troubles is the implementation of a VAT without even reforming entitlement spending.)

First, let me say that foreigners own much less of our debt than you may think. I made this chart to show how much our debt "held by the public" is held by foreigners versus domestic investors.

Until the 1970s, Bartlett explains, foreigners owned less than 5 percent of our debt. Today, they own roughly 50 percent. That share is increasing as we can see in this chart.

Second, the Chinese own less of our debt than you may think. According to the Treasury Department, they own $894 billion out of the $3.6 trillion owned by foreigners. Bartlett argues that Chinese ownership is likely understated and is probably over $1 trillion.

But should we care that the Chinese or others own so much of our debt? Not really, Bartlett explains:

"The Chinese dilemma reminds me of a quip once made by economist John Maynard Keynes: "Owe your banker £1,000 and you are at his mercy; owe him £1 million and the position is reversed." (The quote can be found in his collected writings, vol. 24, p. 258.)"

It doesn't mean that we should be complacent about this increased foreign ownership of our debt. But, as long as the national debt is denominated in dollars, we are okay. To the extent that there is a risk it is the following: if foreign investors fear that the dollar will drop against their currency they could demand a higher interest rates as compensation, or they could  insist that the Treasury issue bonds denominated in foreign currencies. This would be bad because it would shift all the foreign exchange risk to the taxpayer.

As Bartlett notes:

"While the U.S. Treasury has never issued bonds denominated in foreign currencies, it is conceivable that it could be forced to do so if the dollar falls sharply and foreign demand for U.S. bonds wanes. That will be the point at which our debt problem becomes more than theoretical and we are really on the road to national bankruptcy."