BLUEPRINT TO SOVEREIGN DEBT CRISIS
DEBT DEFAULT VICIOUS CYCLE
◄$$$ MY FORECAST IS FOR A GRAND SEQUENCE OF DEBT DOWNGRADES
AND DEFAULTS, THE NEXT MORE RAPID THAN THE LAST. THE SOVEREIGN
DEBT SYSTEMS HAVE BEGUN TO TOPPLE. AN INSOLVENT BANKING SYSTEM
THREATENS ITS NATIONAL DEBT. EVEN SOVEREIGN DEBT IS NO LONGER
SACRED. THE SMALLER NATIONS WILL SUFFER DEFAULT FIRST. THEN
MOMENTUM GROWS POWERFULLY. $$$
The process has seen the first two elements take place. The
financial system broke down from insolvency, with massive USFed
expansion of its balance sheet, but almost nothing accomplished.
Financial firm failures occurred, nationalizations were done,
Black Holes were adopted for Fannie Mae and AIG, colossal bank
rescues were completed, and USGovt took investment stakes in major firms (both financial
and industrial). Yet no remedy took place or was even attempted,
no restructuring to the banking system, no liquidation of impaired
assets, no attempt to encourage a return of industry, no adherence
to valid accounting rules. The lack of remedy and reform assures
the US will suffer future major repeated calamity.
The process will come full circle with total assuredness
and hit the US financial system. All dispute is without basis, and usually ignores the lack of remedy
and reform. Those in dispute point to the flood of liquidity,
with pitifully little realization that excess funds caused the
asset bubbles, and even less awareness that phony money causes
capital destruction. See broken US industries, vanished US
industries, and gimmicks to aid US industries like the Clunker
Car Program and now the Home Repair Program centered on Home
The next step took several months to occur, as Dubai
eventually did cave in to its prolific debt, lunatic ambition,
and blind arrogance. Despite hidden motives like to ruin Iranian
assets in Dubai and to interrupt Iranian imports through Dubai, the construction boom in Dubai will go down as the biggest property folly ever in history. The
cycle of events now moves toward 6pm on the clock dial of the
Vicious Cycle, as the important European fringe nations are
ready to succumb to the reality of their own banking system
failures, property price cave-ins, and the downward spiral of
debt burdens. The momentum will grow in magnificent manner
after the impact is felt more fully on the European fringe.
A critically important factor has changed. The psychology regarding
debt tolerance is suddenly completely different. The globe has
accelerated into a new reality.
WILL NOT BE SPARED
◄$$$ LACK OF REMEDY OR REFORM GUARANTEES THE CREDIT CRISIS
TO COME FULL CIRCLE TO THE UNITED STATES AND UNITED
KINGDOM. EACH NATION HAS BECOME A POSTER
BOY FOR RUINOUS DEBT MONETIZATION. MORAL HAZARD, ARROGANCE,
MARKET INTERVENTIONS, AND FINANCIAL CORRUPTION LEAD TO A CLIMAX.
The analysts will proclaim a new era of cleansing the system
properly, little realizing that their own home turf is subject
to the same cleansing, namely US, UK,
and Central Europe. The contrast will be
stark though. The US & UK
have gone down a path marred by forfeited industry, commodity
dependence, credit dependence, and damaged prestige. The Central
Europe path will be paved by retained industry, certain commodity
requirements, credit provision, and newfound prestige. Europe
is busily forging a new alliance with Russia,
to form a commodity lifeline of extreme importance, but with
little publicity. The US
& UK will turn to tragedy, as
the latest chapters of Weimar Monetary Ruin, separated in an
eerie isolation. The two nations have ramped up to high gear
their money printing and blatant monetization practices, their
investment stakes in destroyed businesses, and their dependence
upon fiat money to cover new debt and rolled over debt for short-term
obligations. This is the essence of monetary inflation, which
when amplified is Weimar-like. USFed
Chairman Bernanke said in the past deflation will not happen
here. Obviously not, but instead hyper-inflation will take root
and explode onto the scene. The USFed
errors are like a predictable pendulum that swings from bubble
to bust, from inflation to deflation, only the amplitude of
the cycles has increased markedly. Think bigger asset busts
and bigger episodes of inflation.
The US & UK are masters of moral hazard, the euphemism
for doing the wrong thing to address a problem in a big way.
They do consistently. The US & UK
continue to display arrogance in their words, in stark contrast
to the disrespect they receive from bankers at global summits.
The US & UK are champions of market
interventions, the disastrous practices that distort important
price structures that lead to the imbalances. Most imbalances
from one year ago are either still in place or growing worse.
The US & UK are the centers for financial
corruption, whose governments integrate and protect the syndicates
that have usurped control and shown defiance to the people.
Climax events come, but not to conform to any dictated timetable.
Think event schedule.
◄$$$ A USDOLLAR CRISIS COMES, WHICH PREWARNS OF A USTREASURY
DEFAULT EVENT, ALL IN TIME. AWARDS PROMOTE ARROGANCE, ISOLATION,
BUT ALSO FOREWARN OF SETBACKS. $$$
While the United States boasts of managing the problem,
and awarding USFed Chairman Bernanke
the Time Magazine 'Person of the Year Award' in self-adulation,
it ignores the risk. Worse, it celebrates the Moral Hazard risk
in full view, as the best policy, the prudent policy, the necessary
policy. The end of the road is a grand USDollar
Crisis and a USTreasury
Default. Both events are written in stone, but Wall Street and
its vassal the USDept Treasury both refuse to openly admit the end game process
in which they are stuck. They are locked on a path without
good options to use. They argue and debate about the threat
of inflation without knowledge of their own follies. They still
cannot define inflation, cannot recognize inflation, and certainly
cannot diagnose inflation as the cause for the current national
insolvency in the US banks, US homes, USGovt, and US industry. They preside over the USTreasury bubble, which continues to expand, identified by
its 0% yield. Expect the US$-based
monetary crisis to occur first, timed after a sequence of unexpected
events. It will tip off the globe, and its credit markets, for
the ensuing USTreasury restructuring shoved down the creditor throats.
The USGovt will be so brazen as to
deny that a restructure writedown
or forgiveness of debt constitutes a
Just a quick reminder. Back in January
1999, Jeffrey Bezos won the Time Magazine
'Man of the Year Award.' The honor was bestowed during the tech
bubble frenzy, with little recognition of the imminent demise.
The prestige of Bezos took a major
hit in the bust, as did his personal fortune. One might conclude
that the award to Bernanke signals a USTreasury Bond bubble soon to
burst, or at least dissipate. Little if any recognition of the
biggest global financial asset bubble is evident. The rotational
cycle of sovereign debt challenges meshes well with the award
PATHOGENESIS OF DEBT DEFAULT
◄$$$ INVESTMENT WATCH HAS LISTED NINE STAGES FOR THE
EXPLOSIVE SETTING OF HYPER-INFLATION. WE ARE CURRENTLY AT A
POINT THAT NEXT SHOULD SEE BOND BUSTS LIKE WITH SOVEREIGN DEBT
AND SOARING MONETARY INFLATION FROM STAGGERING MONETIZATION.
View the financial path to hyper-inflation as a pathogenesis,
one not remotely recognized by the economists and bankers who
push the progress from one step to the next. They are in the
business of attempting to manage asset bubbles, and to avoid
the asset price influence in price inflation calculations. The
Boom Phase#1 occurred many times, but in 2007 when no more potential
asset bubbles were available, the system crashed. Not a business
cycle or a credit cycle, but a system cycle that happens every
two or three generations. The Bust Phase#2 began in 2007 with
the subprime mortgages, but was more clearly recognized in 2008
as a universal bond problem, marked by climax events in September.
The Bond Boom Phase#3 is characterized by the USTreasury
Bond bubble fully inflated today. It is maintained by bond monetization
during auctions, tied at the hip to USGovt
debt issuance. This bubble will probably be maintained by force
soon, like with coerced diversions of bank deposits and pension
money into USTreasury Bonds. Many
competent analysts with a keen eye have identified the present
stage as the 'Eye of the Hurricane' whose relative calm is misjudged
amidst very strange times. This is the current Stabilization
Phase#4 of today. It is not a recovery with remedy, but rather
a recovery from the original wreckage of the powerful bust that
strives to install some stability, even if false. Liquidations
are not an option!
My argument centers upon nothing being fixed, no structural
reform, no true remedy, only piles of phony money thrown into
big banks, into the public domain, into wasteful projects, and
into government sponsored Black Holes. My full expectation
is for a resumption of the profound bust and broad damage, with
grand extensions. We are heading toward emergency usage
of phony money to enable what are believed to be rescues and
repairs. The next stages are well described, and in my view
certainties. They are worsening the embedded problems due to
ignorance and desperation. The crisis will come full circle
to the United States and United Kingdom. See the Investment Watch reference
Markets rise. Creation of asset bubbles.
Market Crash. Inflation goes negative. Central Banks overreact
and cut interest rates. Money injections.
BOOM: Government debt balloons. Debt issuance soars.
Stocks and commodities recover. Bonds stabilize. Volatility
declines. >>>>>>> WE ARE HERE
BUST: Inflation goes positive. Bond buyers pull out. Central
Banks step in and buy bonds (Quantitative Easing). This gradually
crowds out and scares off real buyers.
CRISIS: Money flees inflated currency, at first a trickle then
SOARS: Quantitative Easing. Currency weakness pushes prices.
Inflation accelerates. Commodities rise. Inflation reaches pre-bust
of NO RETURN: Central Banks are slow to contract money supply.
Government continues to spend more. Deficits continue to grow.
Real economy is still slow. Prices spiral.
DESTRUCTION: Double digit inflation. Currency devaluation. Bond
market crash. Inflation goes logarithmic. Confidence in money
is destroyed. Eventually even monetary contraction will not
help as demand for cash evaporates.
RESUMPTION OF GLOBAL CREDIT CRISIS
◄$$$ DUBAI DEBT DEFAULT MARKS A RESUMPTION
OF THE CREDIT CRISIS THAT BEGAN IN SEPTEMBER 2008 IN NEW
YORK. THE DUBAI EVENTS
CONTINUED THE BANK DOMINOES 14 MONTHS LATER. SHOCK WAVES HAVE
BEGUN TO REVERBERATE POWERFULLY IN EUROPE,
ON ITS FRINGE. THE WRECKAGE WILL GAIN MOMENTUM, AS ATTITUDES
TOWARD DEBT HAVE CHANGED. TOLERANCE IS GONE. $$$
The practices of holding bad debt forever could not last. A
major change has occurred. The key is global attitudes toward
debt have grown intolerant, impatient, and parochial. Plenty
of initial rumblings occurred in both the United
States and Great Britain. These events were well covered.
Given all the USGovt bank rescues,
financial firm nationalizations, and economic stimulus initiatives,
combined with those of the UKGovt,
many misguided analysts expected the worst was over. Not even
close. Dubai debts are widely held in the
London and European
banking centers. A shock coming from the Persian
Gulf was forecasted three months ago by the Hat Trick Letter.
Default means certain large additional bank losses and writedowns,
probably even bank failures.
Two very important lessons must be stressed as part of the
Persian Gulf resumption in credit crisis.
1) The central bank franchise system has been discredited.
Their efforts toward solution are proving extremely ineffective
in either financial sector remedy or economic recovery, mainly
because they delivery cures come with more tainted money without
basis and more debt when excessive debt caused the original
problems. This entire point has been analyzed on numerous occasions.
2) Once a banking system turns insolvent, it cannot be rebuilt.
It instead rots in place like a hollowed out building, a
process accelerated by rotten ethical values, euphemistically
called moral hazard. The ample money flows through the dead
rotten parts mainly resuscitate balance sheets. However, those
balance sheets only look better due to accounting rules changes
that deviate from mark to market (reality), and from USGovt equity grants. See the outsized mortgage bonds with
no value at all. See the foreclosed homes withheld from the
market for sale in bloated bank inventory. See the big bank
balance sheets with large entries of idle money sitting in the
US Federal Reserve. These gross distortions point out the lack
of remedy and recovery, a continuation of gross imbalances that
led to the September 2008 initial shock.
If truth be told, the dirtiest American secret in the banking
world concerning the sustained US banking system is not monetization of bonds.
It is that US banks would have suffered a worse fate in the
last year if not for extortion from TARP funds as well as rescue
funds coming from syndicate contraband accounts. Vast flows
entered the big money center banks to shore up their balance
sheets, from narcotics funds. One can only wonder about actual
assets placed by money laundering. No wonder the USFed objects to an independent audit. See the Raw Story article
and reference to the United Nations Office on Drugs & Crime
The harsh reality from the weight of gravity and the passage
of time resulted in a second bang. The biggest victims to Dubai
debt default are the London and European banks heavily exposed. So why
would sovereign debt for Greece, Spain,
be downgraded? They are not related. The answer in my
view is the psychology has changed, toward appropriate action
on debt recognition, toward demanded declaration of ruined conditions,
and toward expectation of realistic default. The attitude has
changed, since major horrific debt problems are global, and
no remedy can come unless some important liquidations
occur. Gone is tolerance toward debt locked in a downward
spiral. The main point of Dubai is that they WILL NOT extend
and pretend like the US
The kings of fraud can extend and pretend but the rest of the
world chooses to move on, or else the Anglo debt can be extended
via pretense but non-Anglo debt will not be extended any further.
The harsh irony is that much non-Anglo debt is underwritten
by Anglo banks. Therefore the climax will come to Anglo credit
The Persian Gulf will not cover it up
and carry it on, like a grand charade with waxy exteriors that
display good health. The psychology has changed radically toward
realism, as meaningful action is demanded like with garbage
collection. My pure conjecture is that the Bank For
Intl Settlements has ordered the next round of debt downgrades
and defaults, giving full approval of the process, with a finger
directly pointed at the Southern Europe
fringe nations. The BIS was critical in setting the September
15th deadline in autumn 2008 for Wall Street to begin the death
process. That timing coincided with a failed attempt for Barclays
to acquire Lehman Brothers, under a BIS time deadline.
DISCREDIT OF CENTRAL BANK
◄$$$ THE CENTRAL BANK FRANCHISE SYSTEM HAS A SHOCK IN
STORE. THE DEBT DOWNGRADES WILL GROW MUCH WORSE, MORE PREVALENT,
TO INCLUDE MORE NATIONS. THE DOMINOES HAVE BEGUN TO FALL, EACH
EVENT MAKING THE NEXT EASIER TO OCCUR. THE PARLIAMENTARY MOVEMENT
FOR THE EUROPEAN UNION WILL BE DEAD ON ARRIVAL. $$$
The central bank system has its next shock in store.
The downgrades to government debt for Greece,
Portugal given last week by ratings agencies signal
upcoming debt related earthquakes. In the United States, the game is
known innocuously as Extend & Pretend, as terms of loans
are extended under the pretended notion that the loans will
eventually turn viable later. This is a concept in line with
kicking the can down the road, avoiding the responsibility toward
proper action. The Europeans are gifted in the same chicanery
to a lesser degree. The entire banking system in Spain has kept housing inventory, whether from
foreclosures or ruined projects, at still elevated prices, stubbornly
refusing to mark them down the necessary 30% or 50%. As a
result, Spain has a wide gap between bid and offer, and
a huge inventory sitting idle, a stalemate that leads to sinkholes
and shock waves. The space of time between upcoming major
disruptive events will shorten considerably. The next nations
to suffer the shame and insult of debt downgrades and defaults
will be the smaller ones, where political risk and self-defense
is much reduced. They are not deemed too big to fail. The process
will still require much time, but events will accelerate in
noticeable ways. Each downgrade makes the next downgrade easier
to deliver. The first default will make the next easier to occur,
with less financial or political resistance.
Notice the lack of US press coverage on the downgrades across Europe on sovereign debt. The story is mentioned with zero follow-up.
actually boasts that the financial markets are handling the
Dubai situation very well, and might be past it already. What incredible
denial, but much expected. Maybe just powerful
ignorance and utter arrogance. The second bang signals
the beginning of sovereign debt defaults, several of them, and
the reshaping of Europe, both with the
European Union and the Euro currency. Many more event details
and explanations of the dynamics appear in the Gold & Currency
Report for December.
The movement toward a Parliamentary European Union might soon
be dead on arrival, pushed by the Lisbon Treaty. Factions inside
are working hard to kill the treaty, which received some hasty
and ill-footed support by Merkel after re-election as German
Chancellor. The split of the Euro currency is soon to become
a reality, a forecast made months before the Persian Gulf debt default forecast. The prudent action would be to put
the Lisbon Treaty on hold while member nations default on sovereign
debt. Instead, the more deeply rooted Parliament-based organization
will be dissolved from member nation debt default. The unsustainable
debt burdens for certain member nations are sure to produce
unspeakable instability. Govt default in both Spain and Greece will soon default, with Greece
first. The spillover of emotions will lead to much
bigger events. The momentum of Spanish and Greek defaults
will kill the European Monetary Union,
and thus the EU itself. With such an unstable and uncertain
overhang, not only will the Parliament be scrapped, but the
European Monetary Union will fracture. The Euro currency must
be quickly reshaped. Plans in place will be put into quick action
after a year of preparation.
DEBT RATING AGENCIES IN THE
◄$$$ DEBT RATINGS AGENCIES ARE CAUGHT BETWEEN COMPETENT
DOWNGRADE OF DEBT VERSUS STARTING AN AVALANCHE OF DEFAULTS.
SOME CALL EUROPE MOVING TOWARD ITS OWN A.I.G. DEBACLE, BUT WITHOUT
A POTENTIAL TO SLIDE IT UNDER A US$-TYPE
PRINTING PRESS RUG. $$$
Moodys, Fitch, and Standard &
Poors are caught in a vise, just like
in 2008 with US banks and mortgage debt. If they do the right
thing and express objective professional opinions, they will
precipitate the next crisis. Difficult decisions must be made.
Clearly the next crisis is to occur in Europe,
in fact already begun. If it remains silent, amidst full recognition
of debt ruin, under the pressure of the Euro Central Bank and
member nation politicians, it will lose yet more credibility.
The factors to push the debt agencies into action are
the obvious debt ruin, the momentum behind federal debt spirals,
and the capital flight that makes it all real time, as in immediate.
The fiscal situations in Greece
might not deteriorate sufficiently to alone merit a credit crisis.
However, the bond market and capital flight might indeed be
sufficient to force the issue. My expectation is that this time
around, the Big Three agencies will downgrade concurrently with
disastrous developments and ruinous conditions, so as to avoid
a total destruction of whatever is left of their reputations.
By acting in unison, they will attempt to preserve their integrity.
They are actually facing lawsuits within the 50 states who suffered
deep losses on mortgage bond investments. State run pension
funds are seeking a recovery from losses due to alleged fraud.
A perverse collusion was engrained throughout the current decade,
marked by improper cooperation between the debt ratings agencies
and their clients, the corporations that issued bonds for rating.
The collusion was worst with Wall Street firms. Just as the
Federal Deposit Insurance Corp engaged in counseling, brokering,
and expedient games with the largest US banks and the USDept
Treasury, the pattern might be in an early parallel stage with
the same agencies. They have approached the Euro Central Banks
and European nations in negotiations for retained bond ratings.