Is The World On Course For The Biggest Mass Default In History

Eurozone bond prices have entered a Kafkaesque world of negative yields Photo: Alamy

Jeremy Warner, The Telegraph: Negative interest rates put world on course for biggest mass default in history

More than €2 trillion-worth of eurozone government bonds trade on a negative interest rate. It's a bubble that is bound to end badly

Here’s an astonishing statistic; more than 30pc of all government debt in the eurozone – around €2 trillion of securities in total – is trading on a negative interest rate.

With the advent of European Central Bank quantitative easing, what began four months ago when 10-year Swiss yields turned negative for the first time has snowballed into a veritable avalanche of negative rates across European government bond markets. In the hunt for apparently “safe assets”, investors have thrown caution to the wind, and collectively determined to pay governments for the privilege of lending to them.

On a country by country basis, the statistics are even more startling. According to investment bank Jefferies, some 70pc of all German bunds now trade on a negative yield. In France, it's 50pc, and even in Spain, which was widely thought insolvent only a few years ago, it's 17pc.

WNU Editor: Everyone knows that this is not going to end well. The only question that remains unanswered is .... when will this happen?

Russia's Debt Default Experience Holds A Lesson That The U.S. Should Heed

An exterior view shows the headquarters of Russia's Central Bank in Moscow, September 13, 2013. To avoid a US debt default Washington might be well served by looking at Russia's experience 15 years ago as 'a lesson, that's the best you can say about it,' says Sergei Dubinin, who was head of the central bank at the time. Maxim Shemetov/Reuters

US Debt Default: Russia's Experience Holds A Lesson -- Fred Weir, Christian Science Monitor

Policymakers considering the consequences of a US debt default might be well served by looking at Russia's experience 15 years ago.

"Default" is one of the scariest words in the economist's lexicon, conjuring up images of government paralysis, financial panic, currency collapse, and social turmoil.

The United States may be peering into the abyss, but Washington might be well served to also look at what happened in Russia 15 years ago, when Moscow suddenly defaulted on its treasury bonds, valued at around $40 billion, much of it owed to foreign investors.

Within weeks, many banks shut down, wiping out depositors' savings. The ruble lost almost 80 percent of its value, the stock market went into freefall and Russia's fledgling middle class was plunged into poverty just years after the Soviet collapse all but destroyed the country’s economy.

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My Comment: I was in Russia when this happened .... it was not pretty. The money quote in this report is the following and one that Washington's politicians should heed ....

.... "I think the 1998 default was a lesson, that's the best you can say about it," says Sergei Dubinin, who was head of Russia's Central Bank at the time. "Both elites and business, as well as the population, can draw conclusions from it. They are that you cannot go on accumulating debts, the budget has to be balanced and taxes have to be paid.

The Looming Deficit And Debt Crisis Is What We Should Be Worried About

Brace For An Avalanche of Unfunded Debt -- Mort Zuckerman, US News and World Report

The fiscal cliff isn't as scary as the looming deficit and debt crisis about to swamp the country.

All eyes have been on the clear and present danger of the fiscal cliff—understandably—but there's a sound in the mountain range that's even scarier than the cliff. It's the sound made by an avalanche, the trillions of dollars of debt that's heading our way, gathering speed and mass. For most people, it's out of earshot now, and that's the way our government prefers to play it in its financial statements. Liabilities are not set out there in accordance with the well-established norms of the private sector, where this overhang of liabilities would set off alarm bells in the markets, with boards of directors in emergency sessions.

We'll come to why that's not happening, but let's consider first why we should regard our predicaments as gravely as any private company does on the path to bankruptcy.

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My Comment: I have seen how uncontrollable debt can adversely impact a country. Argentina, Greece, Spain, Iceland, etc., .... if the U.S. government cannot control it's spending, what happened to these countries will happen to the U.S..

Update #1: Geithner Tells Congress U.S. Reaches Debt Limit -- Bloomberg

Update #2: Why you should really be worrying about the Fiscal Cliff -- Peter Foster, The Telegraph

Europe's Economic Depression Deepens

Europe Clings To Scorched-Earth Ideology As Depression Deepens -- Ambrose Evans-Pritchard, The Telegraph

Like the generals of the First World War, Europe’s leaders seem determined to send wave after wave of their youth into the barbed wire of tight money, bank deleveraging, and fiscal austerity a l’outrance.

The strategy of triple-barrelled contraction across a string of inter-linked countries has been the greatest policy debacle since the early 1930s. The outcome over the last three years has been worse than forecast at every stage, and in every key respect.

The eurozone has crashed back into double-dip recession. It will contract a further 0.3pc next year, according to a chastened European Central Bank. The ECB omitted mention of its own role in this fiasco by allowing all key measures of the money supply to stall in mid-2012, with the time-honoured consequences six months to a year later.

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My Comment: Predictions for this economic disaster have been voiced for a very long time .... but it is only in the past 3 years that the 'chickens have finally come home to roost'. And who is to blame for this mess but the electorate who always found it easier to elect into power politicians who made promises with borrowed money than the politicians who preached 'living within one's means' and to not go into debt. Sadly .... Europe's mess is going to impact everyone, and with the U.S. now following the same economic policy of more debt and higher taxation .... it is easy to predict that in the next year or two we will be finding the same economic crisis in the U.S..

A Rush To A World Depression?

In Europe, policy is still on deflationary settings, with protestors in Athens fighting back against austerity measures. Photo: REUTERS

Protectionism Beckons As Leaders Push World Into Depression -- Ambrose Evans-Pritchard, The Telegraph

The world savings rate has surpassed its modern-era high of 24pc. This is the killer in the global system. It is why we are at imminent risk of tipping into a second, deeper leg of intractable depression.

The International Monetary Fund (IMF) expects the savings mountain to rise yet further next year as the governments of Europe, Britain, and the US tighten belts, in unison, by up to 2pc of GDP.

This is double the intensity of the last big synchronized squeeze in 1980.

They will do so before the private sector is ready to grasp the baton, and without stimulus from the trade surplus states (Germany, China, Japan) to offset the contraction in demand.

Put another way, there is a chronic lack of consumption in the world. "This probably comes as a surprise to most people, gorged on propaganda about excessive debt and the need for retrenchment," said Charles Dumas from Lombard Street Research.

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My Comment: The temptation to implement trade barriers and tariffs will be irresistible for countries that are experiencing rising unemployment rates. Unfortunately .... as the 1930s showed .... trade barriers inevitably always ended with even higher unemployment rates.

Osama Bin Laden Caused Our Banking Meltdown And Financial Crisis?

Not in his wildest dreams could Osama bin Laden have imagined the long-term damage his atrocities would unleash on Western economies Photo: AP

9/11: How Osama Bin Laden Caused Our Banking Meltdown And Financial Crisis -- Jeremy Warner, The Telegraph

When historians look back on the financial and economic turbulence of our times, they will date it not from the start of the banking crisis in 2007, but to the bursting of the technology bubble at the turn of the century, or perhaps even earlier to the height of the Asian financial crisis in 1998.

The policies put in place to address these two events – first the dramatic accumulation of foreign exchange reserves by Asian economies to bolster themselves against future crises, and then the monetary easing applied by the Federal Reserve to deal with the aftermath of the dotcom boom – were to lead directly to today's banking meltdown and accompanying, rolling series of debt crises.

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My Comment: Jeremy Warner's outline on what were the policies that caused the financial crisis are sound .... but I would not blame Bin laden. Who do I blame .... in the end the buck always stops at the feet of our elected officials, and the electorate who continues to vote them back into power.

Is The World Going Bankrupt?

Is The World Going Bankrupt? -- Spiegel Online

Europe and the US are hopelessly over-indebted. The crisis that started in the US real estate sector in 2007 has devastated state finances on both sides of the Atlantic and is threatening to wreck the euro and trigger a second global downturn. The world lacks the political leadership needed to end the turmoil.

The fear is back, in the stock exchanges and in the capitals of the industrial nations. There are growing signs everywhere of a new financial crisis, and the political leaders of the West are looking helpless and out of their depth.

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My Comment: S&P's downgrade of US credit coupled with massive sell-offs on the stock market .... yup .... it certainly looks like we are going broke. What is going to be critical in the next few weeks is what is happening in Europe .... their debt crisis will be impacting all of us, and probably sooner rather than later.

Commentaries, Opinions, And Editorials On Europe's Amd America's Financial/Debt Crisis

We Face Recession Without Shock Absorbers As Berlin Loses Patience With The Eurozone -- Ambrose Evans-Pritchard, The Telegraph

The Great Reprieve is exhausted. The world has used up the three years' grace gained by extreme stimulus after the debt bubble burst in 2008.

This time we face the risk of double-dip recession without shock absorbers. Interest rates are already at or near zero in much of the OECD club. Fiscal deficits are stretched to the limits of safety.

Far from loosening, the US is on track to tighten by 2pc of GDP next year, and Europe by 1pc to 2pc, into the slowdown.

China has already pushed credit to 200pc of GDP. It cannot repeat the trick.

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Commentaries, Opinions, And Editorials On Europe's And America's Debt/Financial Crisis

Hot, hot August. Europe’s leaders are going on holiday, but the markets are not -- The Economist
Berlin Fears Eurozone Cannot Rescue Italian Economy -- Deutche Welle
In this grave crisis, the world's leaders are terrifyingly out of their depth -- Peter Oborne, The Telegraph
We need strong leaders in the eurozone -- The Guardian editorial
Euro dream threatens to become nightmare -- Dan O'Brien, Irish Times
US downgrade 'sounds alarm bell': China media -- Yahoo News/AFP
What US Fiscal Woes Teach China -- Yukon Huang, The Diplomat
China can’t – and won’t – save the world -- Jonathan Fenby, The Telegraph
China Tells U.S. It Must ‘Cure Its Addiction to Debt’ -- David Barboza, New York Times
How long can Canada weather the global economic storm? -- David Frum, National Post
Latin America not immune to U.S. debt deal -- Andres Oppenheimer, Miami Herald
Memories of the stock market crash leave investors on edge -- L.A. Times
We can't rely on oil prices or QE to save us from this mess -- Liam Halligan, The Telegraph
Debt issuers brace for impact from U.S. downgrade -- Reuters

Discretionary Defense -- A Commentary

SURFACE EXERCISE - The Royal Australian Navy frigate HMAS Warramunga engages the Ex-USS New Orleans with her 5-inch gun during a surface engagement as part of the Rim of the Pacific Exercise in the Pacific Ocean, July 12, 2010. The biennial, multinational exercise is designed to strengthen regional partnerships and improve interoperability. Australian Defense Forces photo

From Jed Babbin:

Barack Obama rolled out the ultimate weapon in his arsenal last week when he accused al Qaeda of racism. But Obama's apparent belief that an accusation of racism is the ultimate weapon at his disposal may soon be a commonplace among American leaders because Obama's spending spree will soon bring us to the point where words are all we can afford to shoot at our enemies.

Rich countries can lose wars, as Harry Truman taught us to do in Korea and Lyndon Johnson did in Vietnam. Concomitantly, poor nations -- and poorer-still insurgents -- can win them. Truman and Obama have a lot in common. The Missourian jokingly sought a "one-armed economist" because he was frustrated by economists' penchant for saying, "on the other hand…"

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My Comment: I have been saying the same thing for years in this blog. The financial crisis is having a direct impact on our ability to protect ourselves and our allies. Trillion dollar deficits are not sustainable, and while it is easy to just cut the defense budget rather than entitlements, the problem has gotten so big now that even if the defense budget is completely abolished, the U.S. Treasury will still be be in the red by hundreds of billions for years to come.

Niall Ferguson's comments in this piece are also a must read.

Are We About To Enter The Next Phase In The Financial Crisis? -- A Commentary

The 'pigs' of the Eurozone are causing worries for the other members Photo: AFP/Getty Images

Eurozone 'Pigs' Are Leading Us All To Slaughter -- Jeremy Warner, The Telegraph

The financial crisis is coming to a new, potentially more deadly phase, says Jeremy Warner.

Are we about to enter a third, and this time fatal, leg of the financial crisis? The problems of euroland which have so unsettled markets this week – and in particular those of Portugal, Ireland, Greece and Spain (the "pigs", as they have become known in financial circles) – are worrying enough in themselves.

But they are also a proxy for much wider concern about how national governments extract themselves from the fiscal and monetary mire they have created in fighting the downturn. It's proving messy, though, and they are running the risk of provoking an even worse crisis in the process.

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My Comment: Our (and government's) hunger for debt is what has brought to the place that we are today. Unfortunately .... there is a great reluctance among many of our leaders to accept responsibility and provide the leadership necessary to rectify this situation. In fact .... many of them are still working on the assumption that the worse has passed us by.

Another Sign That Power Is Shifting To China

Employees count yuan banknotes at a Bank of China branch in Changzhi, Shanxi province January 13, 2010. REUTERS/Stringer

The Balance of Power Shifts Toward China -- Steve McCann, The American Thinker

An unreported (in the once mainstream media) disclosure by China has taken the international financial world by shock and surprise. China declared that its foreign exchange reserves had increased to $2.4 Trillion in 2009, a gain of $453 Billion in one year. It is estimated that the reserves will rise by an equal amount in 2010.

The significance of this astounding statistic cannot be underestimated.

By comparison the total foreign exchange reserves of the European Union (27 countries) was $648 Billion in 2009. China's one year increase alone was higher than the total reserves of all but one nation, Japan ($1.074 Trillion). (United States: $84.4 Billion)

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My Comment: When one looks at history, it was always the countries that appreciated and cultivated the importance of money in their society that always ended up in ruling the world. China knows this, but it appears that countries like the U.S. and England who espoused such principles in the past have now decided to go down a different path.

A Shape Of Things To Come -- A Commentary

In Ireland's Deep Budget Cuts, An Omen For A Heavily Indebted United States? -- Washington Post

DUBLIN -- Is this the ghost of America's future?

Like other heavily indebted nations around the world, Ireland is borrowing vast sums from foreign investors to plug its budget deficit. Fearing that the country will buckle under the weight of so much debt, the Irish have an answer: Put the government on a diet.

More than $4 billion in cuts coming into effect after New Year's Day will slash salaries for 400,000 government workers while making painful reductions in benefits for such groups as widows and single mothers to the blind and disabled children. A tax targeting rich Irish nationals living overseas -- dubbed the "Bono Tax" in the Irish press -- will help restock empty coffers at home. Even Prime Minister Brian Cowen, who earns about as much as President Obama, is taking a 20 percent pay cut.

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My Comment: The Washington Post story ignores the impact that government cuts on their budgets will have on their military .... but it does not take a genius to figure out that all the services will be impacted .... and deeply. As for the U.S., some in the military are now getting ready for the cuts that are coming .... but how deep is something that I will leave to your imagination.

America's Bankruptcy Will Bankrupt Its Military -- A Commentary

The American Empire Is Bankrupt -- Truthdig

“China is trying to get rid of all the dollars they can in a trash-for-resource deal,” Hudson said. “They will give the dollars to countries willing to sell off their resources since America refuses to sell any of its high-tech industries, even Unocal, to the yellow peril. It realizes these dollars are going to be worthless pretty quickly.”

The architects of this new global exchange realize that if they break the dollar they also break America’s military domination. Our military spending cannot be sustained without this cycle of heavy borrowing. The official U.S. defense budget for fiscal year 2008 is $623 billion, before we add on things like nuclear research. The next closest national military budget is China’s, at $65 billion, according to the Central Intelligence Agency.

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My Comment: I come from a generation that hates debt, and tries his best to save. In today's America, I know I am an anomaly .... and we (as a nation) are definitely poorer for it.

WNU EDITOR: Must Read Article For This Weekend. Bookmark It And Take The Time To Read It

Image credit: Jim Bourg/Reuters/Corbis

The Quiet Coup -- The Atlantic

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

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My Comment: I have always been a devotee of economists who preached the dangers of too much debt and letting governments and financial institutions manipulate money for their own gain and profit by abandoning true and reliable methods to run an economy.

Social Security and Medicare liabilities that runs in the trillions. Credit default swaps and manipulated debt and insurance .... coupled now with a government and their allies on Wall Street running amok on the spending of money that is not there. The consequences from this will be severe and long lasting. The impact on National Security and World Peace will just be as severe.

The Atlantic has published an excellent article that examines the economic/financial crisis that we are in. I have made over 10,000 posts in this blog .... but this is the first time that I am asking my readers to Bookmark and keep this article for future reference and reading.

I repeat .... this is a very good article. Long, but worth the read and a browser bookmark (to reread again).

The Geithnerconomy And The New Cold War -- A Commentary

Timothy F. Geithner during a hearing before the House Financial Services Committee in July. (Photo: Alex Wong/Getty Images)

From Business Week:

The probable outcome of the Geithner plan is going to make today's crisis look like a zit on the face of the Elephant Man, writes Umair Haque

Let's make a deal. We'll make some bets together, and you get a fifth of the upside—but only a fiftieth of the downside.

Seems awfully generous of me, doesn't it? That's the plea the Geithner Plan makes to hedge funds.

Unfortunately for the global economy, the dollar, and, well, your future, that's a great bet for funds—but a terrible bet for the rest of us. The probable outcome of the Geithner plan is going to make today's crisis look like a zit on the face of the Elephant Man.

Why? Let's get the bean counting out of the way. For staking $30 billion out of $1 trillion, funds take a 17% of the profits. Think about the inequity inherent in that equation for a second.

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Europe's Financial Crisis Will Cripple NATO And It's Military -- WNU Commentary

European Central Bank

European Banks May Need Massive Bail-Out -- The Telegraph

European banks sitting on £16.3 trillion of toxic assets may suffer massive losses, according to a confidential Brussels document.

A secret 17-page paper discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday, also warned that government attempts to buy up or underwrite such assets could plunge the European Union into a deeper crisis.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned. “

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My Comment: Since the Roman Empire, the armies of Europe have always had a symbiotic relationship with the financial wealth of its government and its people. When wealth and financial stability was the rule .... Europe prospered and was safe. When economic dislocation occurred, instability was the result followed by wars and conflicts.

Todays European governments have clearly lost control of economic and social policy. What makes this tragic was that this was predicted years ago by many doomsayers who were critical of the liberal/socialist agenda that was implemented after the Second World War. Free markets were replaced by government regulation and supervision. Financial and currency policy was put under one roof .... installed under the guise of fairness and security, but resulting in only propping up governments that failed in financial policy, and punishing those who acted responsibly.

And what we have today is a Europe whose fiscal and economic policy is at the brink .... an economic environment whose assets are not worth the paper that it is written on. The buildings may still be standing. The trains may still be running on time. But there are millions of victims whose savings and government entitlement programs are at risk or are now destroyed.

The riots in Greece, the Baltic States, and Iceland are a harbinger of things to come. Fueled by high unemployment and a sense that there is no future .... this environment of despair will soon enter the bigger countries, with England and France being the first to experience this frustration.

To respond to these developments, European Governments are scrambling to save money and to limit expenditures. As a result, the military is always the first to feel these cuts. But such cuts always have consequences .... and in Europe this has always led war.

Fortunately ... I personally doubt that war will break out in Europe. Turmoil in places like Bosnia, Kosovo, the Basque region .... this I expect. But war between European nation states I do not. Instead, the crippling of Nato and the downgrading of Europe's military will have consequenbces outside of its borders, and the cost will be steep.

Countries in Africa, the Middle East, the Israeli-Palestinian conflict .... they may look at the U.S. for help .... but they have also looked at Europe as their back-up plan. The wars in Darfur, the Congo, and elsewhere have been very bloody .... but the total would have been far greater if the European military presence was never there.

But the Europeans are now leaving .... unable and lacking the will to stay. So .... the question now arises .... who is going to fill this power vacuum. Unfortunately .... using the past as one's guidepost .... it is usually the worse of humanity that makes their presence known during these times.

And I do expect history to repeat itself again.