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Guest Post: Top Analyst Says “Developed Market Governments Are Insolvent By Any Reasonable Definition”

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Washington’s Blog.

Dylan Grice, a top analyst for European financial giant Société Générale, writes:

Developed market governments are insolvent by any reasonable definition.

Who could have known?

Everyone, actually.

As I wrote in December 2008, “The “Central Banks’ Central Bank” says Bailouts Putting Nations at Risk, as Confirmed By Higher Credit Default Swap Spreads“:

The Bank for International Settlements (BIS) is often called the “central banks’ central bank”, as it coordinates transactions between central banks.

BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:

The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.

In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don’t have, central banks have put their countries at risk from default.

Grice also says:

Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK . Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold.

For background, see this, this, this, this, this, this and this.

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46 comments

  1. davidaa

    In other words, we’re all fucked, except the ones who can afford a ton of gold. Thanks.

    1. readerOfTeaLeaves

      Actually, they’ll be kind of hosed also. Think “Blade Runner”; you can buy a nice yacht, but it won’t guarantee you can find an ocean whose coral reefs aren’t choking on CO2, or any relatively unpolluted region of fishable waters.

      The current system appears to benefit those who successfully externalize the costs of their actions. I could be really glum and depressed about this post, but frankly I’m just relieved that someone is pointing out what appears to be an obvious situation.

      We need finance reform, but also government reform.
      The two are institutional electromagnetism; two facets of the same structures.

      1. Albatross

        Agreed on both reforms, but there is no realistic chance for any sort of government reform. Hence, no finance reform, imo.

  2. briareus

    It doesn’t have to be a ton of gold, davidaa. Incremental purchases over time will add up, and go a long way to offsetting some of your other debts. I’m small fry, but I know which way the wind blows, so I’ve been buying small amounts (like an ounce here and an ounce there) of gold and more often silver since they were ~300$/toz and ~4$/toz respectively. Since then, I’ve not only seen the world prove me right, I’ve seen these incremental investments perform rather well. Not that I care too much, I buy as a hedge against full blown system failure, and so I don’t get too worked up about the bumps and dips.

  3. rp

    It’s like rock paper scissors but in reverse: gold beats paper, weapons beat gold, and paper beats weapons in the current era so the cycle is complete.

  4. rick

    So, you’ve got the US issuing treasuries like tissue paper and every auction is successful and at low rates. Yet China’s trade surplus is turning into a deficit and nobody else has that kind of cash. So, is it the Fed that’s buying? Let’s say it is (and who else would accept 1% for 2 years?). That would seem like a formula for inflation. Except… every default, every short sale, and every company that goes under is destroying money. Question is, which is moving faster – the economy destroying money or the Fed creating it? If the Fed can keep up, then we’ll end up with the same amount of money around as before, but in other people’s hands (and on the books of the Federal government as debt). If they can’t or won’t, then interest rates shoot up and stop goverment borrowing followed by a bigger crash and deflation.

    In that situation, the Fed can only do one thing. Keep buying treasuries at low rates and hope that the real economy comes back to life.

  5. D'Annuzio

    The greatest transfer of wealth in the history of mankind – from the poor to the rich

    Every last one of my pals on Wall Street thinks its boom times right now. I can’t tell you how many have said “I have had my best year ever”

  6. kevinearick

    We are migrating toward individual interoperability between the poles of the battery, so everyone needs to learn how to traverse the looking glass to some extent, without short-circuiting the system, but the mechanical engineer, most of all, needs to ensure that the feedback mechanism creates the opportunity to increase unique participation of humans.

    An economy that programs different colored people to think the same is a short circuit. In the 60s, there were many competent professors that could expand the vortex without defining it. The mechanical economy of cartels, through best business practice in the 70s, increasingly forced professors to re-enforce the vortex and develop the spiel that they were expanding the frontier of knowledge, in order to gain tenure.

    The cartels then replicated that model globally. Now, the real difference between professors in the mainstream university complex is negligible, but they have a great distribution of spiel. The current mechanical research mechanism, controlled by cartels through multi-national corporate funding, manages the vortex. The professors lost that battle in the 80s, which is when open source moved out.

    In the last iteration of the process, the cartels employed IBM to expropriate a significant portion of the old open source system, and “legitimized” it through patent law, courtesy of the US Supreme Court, which it is rolling out as static “smart” technology across the multi-national layer, and down into the nation/state sub-systems. (the implementers are always led to believe that they are in a race, as if the very next turn is going to be the finish line)

    There is nothing wrong with checking the brain in at the door, and retrieving it upon exit. The problem occurs when individuals forget to pick their brain up on the way out. 20 hours of such efficiency per week is plenty.

    The corporations can only offer its labor force $10/hr because replication is a short circuit. The higher paying management jobs in the middle are all temporarily rented, based on the willingness to play the debt game, which is why companies want to check the credit report, and why government gives all corporations, including itself, a vehicle to arbitrarily create debt for everyone. The banks are symptoms.

    The President knows a great deal about one leg of the power circuit, and he has a sketchy understanding of the second leg, but he has no knowledge of the third leg. There are always those who think that they have infiltrated open source. The kids have changed direction. They have kids, which have kids. Have a nice day.

    The grid will be stable until its not. There is nothing preventing anyone from being appropriately prepared, except the expectation that the existing ensamble of actors is going to solve anything.

    Open source has its own highly distributed, mobile university system, which exists beyond the knowledge of cartels. It helps to have a distribution of hats to remind yourself what part of the system you are currently operating in.

    For many, those who are way behind the curve, the answer is to get a 20 hr/wk job, re-adjust the personal cost structure accordingly, whatever that takes, invest the other 20 hours reading, to develop a prototype for economic re-entry, and, most importantly, keep track of ensuing profit based on a personal value system, instead of the value system proferred on tv.

    There are few households in this country that do not possess non-performing assets, and need some function performed. A community board with non-performing assets and functions needed is not a bad start for a market at that level. Ultimately, the cartel pricing mechanism needs to be replaced, and such a board will provide the means to investigate the local effect of cartel related price assumptionms.

    Excess, non-performing capital always argues that capital is more important than labor, because capital is scarce, which is a self-fulfilling prophesy / feedback mechanism. Where are the limit switches and how are they controlled?

    1. kevinearick

      take a good look at internal and external control of property by the state, and the associated ensamble of actors. their are many means to reorganize that function, which will lead to inter-local connections.

      the feedback loop will deliver increasing diversification and tradable surplus, without the need for external subsidy, which will provide the pathway to global connectivity.

      1. kevinearick

        strip everything out. everything. you will be amazed at the hoard load that has brought system circulation to a halt.

        1. Justice St Rain

          If you mean by “hoard load” the amount of savings the wealthy have pulled out of the system in order to make investments, then you are spot-on. The world economy cannot function when only 10% of the wealth is being used for living, and 90% is being invested in the hope of making more money. The ONLY long-term solution is to take money out of the hands of those who have more than they can possibly use, and put it back into the hands of people who will actually work for it and spend it.
          I agree that there is nothing wrong with printing up more money to make up for the money that evaporated in the crash, but only if it is inserted into the economy at the bottom instead of being loaned to the wealthy so they can make more money off of it.

      1. kevinearick

        that young guy the other day said it best:

        “just stop”

        along with the response about not arguing for infinite monetary expansion, just lots, lots more.

        the Fed is like a lie that just keeps getting bigger to cover over the last iteration. it’s going to stop mbs support, but back the GSEs, which are going to back mbs, with 15% home vacancy, and another like amount in the shadow, while homebuilders keep building and the REITs are fashionable junk, and the community banks holding the commercial junk point at the big banks as the problem, while the Fed announces that it needs 4% structural inflation going forward, in a big circle you know what.

        like a comedy, that’s no longer funny, because the drain is sucking the real economy in with it.

        prices are relative.

        (PJM: that China motor driving the global economy … anything beyond China and that baby seizes real quick, and Europe’s hidden crap is worse than America’s hidden crap, which is why the taxpayer had to bail out AIG. that decoupling from the black hole thing hasn’t worked yet, but best of luck. optimism rests on liberty, which is under attack everywhere, including China.)

        1. kevinearick

          shall we define bankruptcy as hard-working people getting thrown under the bus because the definition of words in a contract is determined by the author, depending on the occassion, so the author is ensured more junk with which to impress the feudal cohort.

        2. Skippy

          “Just stop” salute!!!

          Just sold all non-preforming assets and converting to things that I need or would like to bring across the bridge…Gold bah, stocks bah, bonds bah, 401k or Superannuation bah.

          Skippy…work (toil) is hard…when its for a unkind master..much more satisfing when its for enjoyment.

    2. Stelios Theoharidis

      Wasn’t a risk of currency default potential chart posted on here the originated from Societe Generale a couple of weeks ago. Everything on there was looking a bit distorted with the PIIGS having potentially higher default rates than third world countries and precarious regimes run by dictators. Everyone was talking about how the sharks were swarming around club med looking for blood.

      It appears like they are crying wolf again. Not to displace the potential worries about the economy, I have plenty. But it appears and this is a just a hypothetical but maybe societe generale is running a marketing campaign for their positions in gold? If you put the two together they are probably shorting the Euro as well. They are willing to burn the house down to make a buck. Naked Capitalism just played into the barn burning. Burn Burn Burn.

  7. zanon

    This is nonsense.

    “Bankrupt” cannot apply to fiat currently regimes.

    The US Treasury need never bounce a cheque.

  8. joebhed

    Gotta agree with zanon, only exception being any ‘reasonable’ definition.
    Where is the reasonable definition of the insolvency of a fiat-monied nation working with a sovereign money system?

    I would consider that the money-system itself can be insolvent, such as where the amount of new money being created is insufficient to make the debt-service payments on the existing money – a la the US debt-money system – but the nation itself is yet capable of acting to change any monetary system parameter and correcting the inherent insolvency of the money system.
    Voila! Solvency.

  9. PJM

    I dont pretend annoying others. Excuse me for the last days but I seems to me that anglosaxon world dont capture the entire picture concerning world status.

    Anglosaxon world is living a hard crisis and is missing what is happening outside their lands. Everybody looks only the bad things, as if economic analisys is entertainment. Anglosaxon opinion makers are following Jim Cramer´s way of entertainment TV news. Too bad.

    I read somewhere that almost 73% of americans missed the pullback in the stockmarket. Why? Maybe economic analisys in anglosaxon world is entertainment or are allways selling things, like gold.

    Greece was in spot almost everuday but thw world is moving forward with a lot of good news. Maybe the anglosaxon world dont have that kind of news and only searchs others bad news to control his emotional stress.

    World GDP is growing again at fast pace. Asia and China are leading the current business cycle but nobody wants to see that reallity. Asia and China has decoupled from the rich countries. But the anglosaxon world only see armaggedon picture and forecasts. This dissonance cognitive is a case study for acamedics. In my humble opinion this dissonance cognitive is a signal from decandence. I remember the optimist american spirits. Now they only see armageddons, bad things and dangerours thougths.

    When we read anglosaxon view of the state of Europe, they onlye see Greece, PIGS, defaults and so on. They live in another paralel univers. We can check this news:

    “East Europe Steps Up Debt Sales as Austerity Rewarded”

    In http://www.bloomberg.com/apps/news?pid=20601095&sid=aPWUSe8Y.DxY .

    As we can see, Europe is better that you recongnize. Much better than you think and thats why the cross €ur/u$d is almost at the same level than one year ago. What is the real conditions about Euroland: with problems but better than looks at first glance.

    As I said before, this dissonance cognitive has a price: missing one of the best rallies that I saw in the Wall Street in my entire life. And I bet that has some legs to follow. Companies listed in Wall Street are in better shape than american´s analisys recognize. But this is a problem for analysts not investors. Who missed the rally maybe should be more optimist and less pessimist. The world is in better shape than USA but just few recognize that there are more than the lands between NY and LA.

    Sorry about my words but it seems that anglosaxon world loves bad news. what a difference between today and some years ago.

    The world will not end tomorrow. Enjoy as you can. ;)

    1. sam hamster

      May you enjoy your happiness while it last. If you believe that “Asia and China are leading the current business cycle”
      then so be it. Belief cost less than prescribed anti-depressants.

      1. PJM

        My dear Sam Hamster, look the figures not the news.

        “ADB to revise up 2010 Asia GDP forecast to 7 pct area

        NEW YORK, March 2 (Reuters) – The Asian Development Bank plans to revise upward its 2010 economic growth forecast for developing Asia to around 7 percent, citing the ability of some nations to quickly employ massive stimulus measures, the bank’s top official said on Tuesday.”

        In http://www.reuters.com/article/idUSN0220455820100302

        Not bad for a part of the world who is struggling to depend less in exports to rich countries.

        However I think the future could be more brighter:

        “Japan’s Exports Grow at Fastest Pace in 30 Years (Update3)

        March 24 (Bloomberg) — Japan’s exports climbed at the fastest pace in 30 years in February as global trade recovered from the worst postwar recession, increasing prospects for a sustained economic rebound in the nation.

        Shipments abroad increased 45.3 percent from a year earlier, helping the trade surplus expand the most since 1982, the Finance Ministry said today in Tokyo. At 5.1 trillion yen ($57 billion), the value of exports remains about a third lower than the March 2008 peak of 7.7 trillion yen.

        Demand for Japanese goods rose to all regions for the first time since August 2007, the report showed, fueling sales for companies from Komatsu Ltd. to Mitsubishi Electric Corp. The trade revival has spurred factory production for 11 months, gains that economist Akiyoshi Takumori expects will continue.

        “Before, exports were rising mostly because of Asia, but now the U.S. economy is rebounding, too. That’s definitely a good sign,” said Takumori, chief economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “It’s very unlikely that Japan’s recovery will falter this year.” ”

        In http://www.bloomberg.com/apps/news?pid=20601080&sid=a.fqdwm4OVbs

        USA is exporting more. Much more. The problem is internal imbalances. Too much spending and excessive low interst rates.

        “U.S. goods and services exports in January 2010 are up 15.1 percent from the $123.9 billion in exports in January 2009.”

        In http://www.commerce.gov/s/groups/public/@doc/@os/@opa/documents/content/prod01_008993.pdf

        Another example. It is true that a lot of countries has problems with their fiscal balance. But with nerve and hard work that ca be fixed:

        “Hungary Advises Greece

        That compares with Hungary, which BNP’s Pawlowski says is the best example of a fiscal turnaround. Prime Minister Gordon Bajnai has cut spending by 1.3 trillion forint over two years to comply with a $27 billion IMF loan. Last year’s budget shortfall was 3.9 percent of GDP, compared with 9.3 percent in 2006. ”

        In http://www.bloomberg.com/apps/news?pid=20601095&sid=aPWUSe8Y.DxY

        Is the same as in Portugal. As soon you discover the problem more quackly you can fix it. The portuguese government knows that we still have fiscal deficit problems. So authorities are managing the resolution of the problems, step by step. They are taking measures to cut fiscal deficit and wayting for the resultes. If that measures arent enouph authorities have more mesaures to implement if is necessary. They can sell more assets to cut debt, for example.

        Economic analisys inst looking the picture and thinking that nothing will not change. Economic analisys is looking the dynamic mechanisms between past and probabilities in future. Nothing is statitc and economic agents are allways changing thier behavior as they process information gave by markets, demand and so on.

        Economic analisys inst wishfull thinking. Markets are the best thermometer of economic activity. Markets are often wrong but normaly are right. Markets are the best indicator and you can look for the rally. Global rally. of course that doesnt mean we will have DJIA at 36 000 next month or year. But markets are doing as allways do: process information and recflect in prices. Isnt what tells all books about price discovery in capitalits systems?

        Please dont be naif. Dont pretend to be more smar than markets. Follow markets not fight them. Markets normally are right not our analisys.

        Enjoy as you can.

  10. papicek

    zanon’s point is well taken, and I’d watch inflation to see when some of these funds being pumped into the economy begin affecting prices.

    I often wonder where we’d be if Paulsen and Bernanke had “saved” the banking industry by putting insolvent institutions into receivership . . . .

  11. Sy Krass

    Fiat currencies are all about cofidence. “Markets can stay irrational longer than you can remain solvent,” no truer statement as been spoken. The music is going to stop one day, probably one day soon. It will give some warning, maybe 3 to 6 months out, but the end is the same, if one fails, they will all “fail” even if that failure means printing ’til interest rates are 1,000%

  12. Mr. E

    Sy Krass,

    If your idea was true, then this would be happening now. but it isn’t.

    When the fed repurchases debt from the secondary market, this operationally the same as if the government simply printed money and just paid cash for everything.

  13. sam hamster

    Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser, Peter Schiff, Max Keiser!

  14. don

    From the Abstract for a book review of The Poverty Regime of Village India, by Jan Breman :

    “These realities tend to disappear behind reams of numbers showing healthy GDP growth and even declining poverty in India. As Breman writes, such figures do not accord with what he has seen with his own eyes in Gujarat, one of the most ‘dynamic’ states in India. His work in the country’s lower depths tells a different story, in which vast inequalities and crushing deprivation persist.” The New Left Review, Jan/Feb 2010

    Quoting Breman:

    “The fight against poverty [regarding India] seems to have been transformed into a fight against the poor. A point of no return is reached when a reserve army waiting to be incorporated into the labour process becomes stigmatized as a permanently redundant mass, an excess burden that cannot be included now or in the future, in economy and society. This metamorphosis is, in my opinion at least, the real crisis of world [not to be restricted to India] capitalism.”

    No . . . the US will not become bankrupt, for it will escape such an outcome by way of austerity, as will be the case in much of developed economies.

    Furthermore, eventually it will become apparent that no longer is there a need to prop up consumption in the face of global over-capacity, as all attempts to do so have failed. Under such circumstances, investment in production will only serve to exacerbate matters.

    So what’s left for those who hold capital (fictitious or not) but to see that it flows in circuits of speculation – money begetting more money – thus ensuring that one segment of the global population, at least, does quit well.

    1. Alexandra Hamilton

      “The fight against poverty [regarding India] seems to have been transformed into a fight against the poor. A point of no return is reached when a reserve army waiting to be incorporated into the labour process becomes stigmatized as a permanently redundant mass, an excess burden that cannot be included now or in the future, in economy and society. This metamorphosis is, in my opinion at least, the real crisis of world [not to be restricted to India] capitalism.”
      ————————————————————-
      Good observation. This is a very dangerous development but it is not a crisis of capitalism. Capitalism is set up to work this way. Most people, except the capitalists, are only needed to serve the interest of the capitalists, i.e. as workers that increase the wealth of the capitalist. Now, what happens if you replace human workers by machine workers?
      Most of humanity becomes redundant and will b considered useless and a drain on natural resources, endangering the very survival of the capitalists.
      The next step is obvious.

      1. almostinfamous

        only the first movers to embrace technology have any competitive advantage – and that too briefly. there is no value to realize later, because sooner or later everyone has machines and they all work about the same, with similar input costs and efficiency ratios.

        the value was extracted from the labour of the humans – without exploiting humans, capitalism would literally collapse under it’s own operating paradigm.

        this is not original thought – it was explained in a much more detailed and convincing argument but i cannot for the life of me find the link to it…

  15. Paul Tioxon

    The Gordian Knot solution. You move to political direction as opposed to market direction. You would be surprised how things can run much the same as they are now, except of course, NOT the top of the pyramid. Think of everyone on the Forbes list as Bernie Madoff. I hate to dredge up the French Revolution, but resentment does run deep. Bus drivers will still be bus drivers, farmer will still be farmers, but if you do not think Wall Street and The Fed can be replaced by bureaucrats, think of SAP Enterprise Software, except for all sectors of the economy. I am sure you know some people who have already run these government simulations, minus the banking and capital markets crap. It will work well enough for most of the population, after all we are not use to the standard of living of the the top 20% of the economic stratification schema.

  16. Cathryn Mataga

    It’s just the whole situation with the
    dollar, specifically, is just so weird
    and mind blowing. The poster is right,
    that as far as paying back all this debt
    with taxes, well, it is past the
    point of no return. But does this
    lead to hyperinflation and going back
    to barter? Who knows. It’s just
    a weird situation.

    The reason the world hasn’t ended yet
    is because people are willing to hold
    dollars. The whole thing holds
    together because the guys holding vast
    amounts of dollar reserves are rational
    and don’t want to shake the boat. If
    someone decided to turn their $0.5T
    of dollars into hard assets, well,
    that would be bad, but nobody wants that.

    Maybe the government debt bubble
    can just grow for a bit, maybe even
    decades. The one possible problem is
    war. With war, rationality goes out the
    window.

  17. charles

    View from Europe:

    It is now a game of extend and pretend: Geithner denying ( another perjury ) in front of Congress yesterday that the 8 trillion debt of the GSEs are sovereign debts. Ghee, as long as you can use Bennie’s printers.

    As for Europe, the European countries have 1 trillion in
    sovereign debt to roll over in 2010..So now wonder the IMF is coming into the party..Grice is perfectly right technically, I would also recommend R.Middleton’s analysis of the forthcoming Pan-European debt crisis: http://boombustblog.com/

  18. Mr. E

    Fiat currency governments cannot go bankrupt.

    For those of you who doubt us, please tell me what the Fed is doing right now by purchasing huge amounts of treasuries a few days after they are sold. If you don’t consider this the equivalent of simply spending the money without issuing the debt, you don’t know how to do accounting.

    And if just spending the money was that bad, then what the fed is doing would send us into a spiral already. but here I sit, in Costa Rica, sending this over the internet. In the end of the world “all governments are bankrupt” scenario, I would be dead already.

  19. Toby

    Don’t you think that the situation is more global than national? What I mean here is that there is an enormous need internationally to sustain this system, since all are dependent upon it, therefore analysing the Fed’s actions in isolation is insufficient. That we are not all eating shoe leather does not mean that this system can survive indefinitely — nothing can, so no points for noticing that! — it means that calling the point at which it “breaks” is very difficult, probably because it is a confidence game, not a “scientific” one. This fiat, approaching-zero-reserves fractional reserve system is powered by collective belief to a large degree. How long that belief can be sustained is anyone’s guess.

  20. Toby

    Hi joebhed,

    the ponzi quality of a pure debt-based monetary system is not lost on me, but thanks for the link and the response. I was hoping Mr E. might take the bait ;-)

    What interests me here is the how long the ponzi can be sustained, because it is global. There is so much vested interest in keeping it running, so much cultural/social momentum and impetus powering it, and I suspect a huge reluctance generally to pull back the curtain and see how rotten things have become, the “confidence” part of the process has, I’m sure, quite a bit of steam left in it. As Mike Shedlock repeatedly says, it has to break, he just doesn’t know when. My guess is something unforeseen will snap confidence sufficiently for a quick and rapid unraveling, but right now the manipulators are doing a great job of pumping confidence up.

    We will see what will be.

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