Guest Post: What To Expect When You’re Expecting… Massive Defaults On Multiple Scales

Tyler Durden's picture

Submitted by JM

What to Expect When You're Expecting... Massive Defaults On Multiple Scales (PDF)


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DarkMath's picture

For all of you wondering WHEN this debt defaulting will begin I submit to you this evidence:

My reading of this is that the Central Banks have lost control of the last plug in the creaking dike holding back an alternative currency that will wash away all debts.

Yes ladies and gentlemen the end is nigh, Central Planning is about to go the way of the dodo. The rising Gold price is a catalyst that will precipitate debt to fall from the system like crystals dropping from a super saturated liquid in a high school chemistry class:

Interest Rates and the Price of Gold are inversely proportional.

A rising Gold price will pull dollar holders into Gold because it's an alternative currency.

To keep dollar holders the Fed will have to raise Rates to attract them (like Volker did in 1980).

Rising Rates will pop the ridiculous USTreasury Bond Bubble.

And Worse....wait for it.....waaaaiiit fooor iiittttt.....cause the Treasury to "restructure" their debt.

-1Delta's picture

Only one thing to expect... QE infinity

uno's picture

QE to infinity and beyond, Fed getting guidance from cartoon characters


Trichy's picture

QE won't help. We have passed that point. We are at the Monetization stage and if Benron pushes that button hard enough all hope is lost.

jm's picture

Affirm.  QE won't inflate anything.  But it will keep financial institutions solvent.  And that keeps outright deflation somewhat in check.

Trichy's picture

Thx for the good read jm.

Cognitive Dissonance's picture

Thanks for shooting straight and thinking realistically. Always helpful when the doctor looks the patient in the eye and tells him or her death is close unless, and let me stress the unless, major changes are made.

The life expectancy of those people now (mostly) depends upon their ability to either deal with reality or engage in denial over their situation. Those that face the music suffer more immediate pain but recover quickly. Those who bargain and ignore suffer less immediate pain and die much sooner.

Let the games begin.

Turd Ferguson's picture

The end of The Great Keynesian Experiment is upon us.

Prepare accordingly.

living on the edge's picture


The key is to prepare accordingly. A good portion of my days are spent trying to prepare for the inevitable collapse. The biggest problem I see are most people have done zero preparation, in fact the masses are in denial.


centerline's picture

Wish I knew exactly what "accordingly" means.  Lots of variables here.  Nothing is for certain.  And trying to time things is going to be tough as well.  Changes can occur faster than we can keep up.


I don't want to sound like a doom and gloom person, but at the same time not having any basic preparations at all is really foolish.  Most people I know have no preparations for anything in place.  I would also say that 9 out of 10 people or more whom I talk to think I am just nuts for having any sort of rough plan in mind if things get "funny."

flacon's picture

I think that I fear the "masses that are in denial" more than I fear the economic collapse... 

Eternal Student's picture

The trouble is, there will be another Keynesian experiment at some point. The only thing which Economists have ever proven is that they simply will not learn from past mistakes. Ever. How many have come out with new insights since missing the biggest event in their careers? None that I've heard.

The article itself kind of misses the big picture in many ways. First, it doesn't go into the massive leveraging in the derivatives market. This House of Cards is just waiting to collapse. Second, it assumes only that a bond market dislocation drives these events. That's just one way. Another way is a massive fall in the stock market, which triggers margin calls on all of the credit out there.

Third, it doesn't go into at all what the consequences of a collapse in Credit means. Most of our money is Credit. The economy stops. Period. And it will take years to get things going again.

In the meantime, the highway and bridge system needs $5 Trillion in repairs now (according to the group of engineers who work on this). And our electrical infrastructure needs $1 Trillion in repairs. Certain transformers aren't stocked, but are made when they are needed.

Good luck with getting any of that done when credit has collapsed. And there are other implications, but I won't belabour the point.

In summary, I think the author really needs to look more at the big picture to have a better understanding of the consequences. But that article is a good starting point.

jm's picture

These are good comments, and I'll try to say more when I get the time.

For a couple of generations of the 60s, 70s, and 80s, there's been a lot of fat in the economy, which enabled redistribution of wealth through fiscal policy and tax policy through monetary easing of varied stripes.  This shit may well be over, and we have to think tragically like Nietzsche instead of flippantly like Seinfeld.

I posted about the implications of an IRS meltdown before, but things have changed a lot and what I said is wrong.  Rehypothecation is shrinking because custody relationships have changed big time.  Counterparty risk has a large impact in institutional arrangements. 

With IRS you are in the money or out of the money.  Somebody wins and somebody loses.  You can paper over losses by rolling positions into new master swaps.  So it is a robust market, plus a lot of the swaps go through swapclear, which is the closest thing to bullet proof I know of. The only way that is going to collpase is through the demise of another entity like Lehman.  this is why the Fed will not let it happen again.  They've seen the impact.

Probably I didn't make myself clear on credit, short-term will decline as everyone that terms out their debt.  Some businesses will always make money, and cash will be king.  In a world of very limited credit, cashflow replaces it.  This is radical thinking, but how it was for most of human history.  See the points about business conglomeration, strategic default.

The Fed has plenty of ammo to keep things running at subsistence level through securitization of debt.  No will winds are going to roll back securitization.  It's just too godd an idea.  The novelty is where it will be coming from.

Roads, utilities, trillions of gov't stuff?  The world I decribed doesn't permit much of it.  If it is necessary, then it can be tolled.



Goldenballs's picture

Gold unaffordable to the many.Governments and Organisations fail and fall.Common sense returns .......... Governments and Banks work for the public good.

weinerdog43's picture

Nice paper.  I'd very much like to see additional posts about possible defensive strategies in the short and medium term.  Having a good store of precious metals (including lead) is great, but it would be intersting to try to focus on possible profitable opportunities that would emerge out of the rubble.

grunion's picture

I agree dog43. With all the brainpower available on this site, it would be very interesting if the strategies you are asking about were discussed and fleshed out.

For some reason though, most posters here confine their discussions to the problems and not the possible solutions.

Perhaps it is merely a space problem.


jm's picture

I doubt if this will happen.  It's just one of many negative tail risks.  You only buy tail risk hedges when they are cheap, because they are low probability events.  TPTB live and breathe to kill tail risks before they happen. 

Think instead about the most likely event and build core positions around that center scenario.

Rogerwilco's picture

Insolvency doesn't matter anymore. Once people make that mental leap, the task becomes one of "managing" liquidity. Who's your Daddy?

Herne the Hunter's picture

"... And it’s not a stretch to think that Greece, a Baltic country ..."

Its Balkan... </pedantic mode>

jm's picture

No.  The country to which I refer is in the Baltics.

Herne the Hunter's picture

But you do agree that Greece is a Balkan country? Which was my point.

jakoye's picture

What? What country are you referring to if not Greece?

I couldn't go on reading your article when you made such an elementary mistake in GEOGRAPHY (a much simpler subject than economics).

jm's picture

So many idiots.  Latvia.

jakoye's picture

Ohhhh, I see what you meant.

So if we agree that I'm an idiot, I think we can also agree that you're a bad writer. See how much clearer your sentence is when you replace "a Baltic country" with "Latvia":

"And it's not a stretch to think that Greece, Latvia (with a debt-to-GDP ratio of around 500%), and many US states are expecting."

Now instead of "a Baltic country with a debt-to-GDP ratio of around 500%" looking like an explanatory clause to the subject of "Greece", now it looks like the independent subject about Latvia that it is. Of course, the sentence itself is still a fragment, but, you know, I'm an idiot... what do I know?!

Pope Clement's picture

But it once was a Baltic country!, see Prof. Felice Vinci's stunner 'The Baltic Origins of the Homeric Tales' (Omero nel Baltico)...<uber pedantic mode> just need a long enough timeline.

Treeplanter's picture

The Balkans are farther north.  The Baltic is too far north in spite of ancient tales.  Greece is a Club Med country where tourists will one be hunted like deer.

Treeplanter's picture

The Balkans are farther north.  The Baltic is too far north in spite of ancient tales.  Greece is a Club Med country where tourists will one day be hunted like deer.

Pope Clement's picture

Just sayin it's interesting that the proto-greek language was a language of Sweden and that the Pelopoponnese, Naxos, Thrace, Troy for example were locations in the Baltic.

oklaboy's picture

bullets and butter

Hidetora's picture

As Samuel L. Bronkowitz would say: "That's Armageddon!"

airedalesrule's picture

You don't get it. We are given to understand:

All state governments "will pay principal and interest in a timely fashion, even the states that are most in the news." said Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management...States in particular are generally safe because they can't really file for bankruptcy and most are required to pass a balanced budget every year..." (exerpted)

Don't worry, be happy.

crzyhun's picture

What we need to do is form an online community titled

"When the Sh... Hits the Fan" or WSHF, and do a cross sectoral analysis of event, probablity, result, reaction, and praction. Something like this....

Open only to those, sorry who have the mentality or wherewithal to not get their knickers in a knot, limited idelology, minimally survivalist, no off the grid go to the land bunker thinking BS. Serious thinking that has weight. Like Stratfor and ZH combined hammered into an agenda of evolving steps.

Cash is not king nor is gold the answer. Let's start with this and go to it.

Kobe Beef's picture

Where is Mako on a thread like this?

anonnn's picture

Greece is a Baltic country? Pls check dictionary.

"And it’s not a stretch to think that Greece, a Baltic country with a debt-to GDP..."

Your "Exhibit A--- Adverse Effects" is true, but  not useful to resolution beyond "the solution becomes the new problem" or extend-and-pretend.  The underlying fault has not been identified. Namely, fraud in the guise of various clever-strokes seeking to gain by causing another to lose.

Justice is a perk of ThePowersThatBe. It is a myth for us Unroyal Lownesses.

anonnn's picture

Presidential Haiku


Stop! You're killing me.

Stealing honest labors' reward.

Taught by fakers.

Mercury's picture

What would happen if both the bond market and the stock market were to blow up at the same time?  I don't know about vice/versa but when has the bond market ever shit the bed for any sustained period and the stock market stayed robust?

jm's picture

Not to my knowledge, but I'm not sure if the old Brit Perpetuals really count as a bond. You know as well as I stocks dumb, bonds smart.

However, a good candidate for an exception may come from the remarkably well-received auctions of JGB40s... 2.2% I think.

Madhouse's picture

The who said it game:

"Go fuck yourself." --to Sen. Patrick Leahy, during an angry exchange on the Senate floor about profiteering by Halliburton, June 25, 2004

"Deficits don't matter."

The man that destroyed the Republicans, and led to the Obama disaster.

The man, who after costing us a trillion in money we did not have,is still personally costing us millions in security and medical bills to keep his ugly ass alive. Thx Dick.

Next: Nancy


Herry12's picture

There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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