This page has been archived and commenting is disabled.
Must Read Reflections From GMO's Edward Chancellor On The Sovereign Debt Crisis
GMO's Edward Chancellor has written what is arguably the coup de grace of papers analyzing the dynamics of soveriegn default, together with the conditions required to succumb to this terminal condition, and is the functional equivalent of months of research and combing through all the recent literature on the topic. By initially highlighting the reasons for government default, which include i) a reversal of capital flows, ii) unwise lending, iii) excessive foreign debts, iv) a poor credit history, v) unproductive lending, vi) rollover risk, vii) weak revenues, and viii) rising interest rates, Chancellor presents the frame of reference in which every potential sovereign default situation should be analyzed. Chancellor also highlights several examples where a sovereign default was all but assured (Britain post the Napoleonic wars, Sweden in the 1990s), analyzes the opportunity cost of hyperinflating instead of pursuing default (when inflation is more convenient, when it resolves political conflicts, when avoiding inflation is a low priority, and when there has been a public credit flameout), and makes an exhaustive analysis using historical parallels of today's sovereign debt crisis. He summarizes the different view of the current sovereign fiasco as follows: i) this time is (really) different, ii) we are not all Greek, iii) posits that the US is not on the verge of a default, iv) that inflation is more likely than default. He concludes by analyzing potential tipping points, which in a herd mentality market such as ours, are all that matters, and suggests that Japan is precisely on the verge of such a tipping point. Yet his two most critical conclusions, in our opinion, are the following: "public finance is a ponzi scheme" and, for all those who are fans of Rosie's thesis that bonds are the go to investment currently, "Current yields on government bonds in most advanced economist are at very low levels. Under only one condition - that the world follows Japan's experience of prolonged deflation - do they offer any chance of a reasonable return. But this is not the only possible future. For other outcomes, long-dated government bonds offer a limited upside with a potentially uncapped downside. As investors, such asymmetric pay-off profiles don't appeal to us." Must read for everyone who wants to have an intelligent opinion on the matter.
h/t Adam
»
- 28702 reads
- Printer-friendly version
- Send to friend
- advertisements -
Short long bonds, Bitchez!
Agree... but not today
Agreed. We are in a massively deflationary cycle. Long bond will yield 1% or so before being shattered. The money will move from stocks and assets to ever shortening treasury maturities. Hyperinflation will only take place after the world's bond markets are dead and buried and so are the banks with their quadrillion in derivatives. Marginal productivity of debt has absolutely collapsed. Every dollar of additional borrowing is causing GDP to contract by 40 cents as shown in the Gordon T Long article, extend and pretend.
Maybe I will read the thing later.
I have read Reinhardt & Rogoff's book ("This Time is Different") that seems to have a different take, notably that This Time is not different.
Gold works out OK either way though: default or inflation. Works out even better if it is a BIG default or hyperinflation.
No easy way. The haves have an advantage. The have not's, not so much.
Convert your assets, NOW, to the worst case scenario assets, and relax. RIGHT?
another argument for gold/silver
You can get on GMO's EMail list for free. Thanks ZH for presenting this to the world.
O/T but Lebron will form the trinity in Miami with the "HEAT". Symbolism abounds; trinity in Haides. Anyway.....good luck everybody.
We are so in the middle of the shit storm. Got my rural land. Barry has taken away all the good. Good work ZH. Thanks a bunch brothers and sisters.
For an off topic read, check out mises.org http://mises.org/daily/4544
This chick started Mother Earth magazine. The author of this story makes the article super interesting. Quote - "Benjamin R. Tucker was 15 years old and still living in his parents' house"
not to complain but Scribd sucks ( i always go through the routine and fetch the pdf - though that feature seems disabled by Scribd for this article) but I do thank ZH for bringing these articles to our collective attention
ZH is the very best
Interesting article.
I have a question on the authors' assumptions. There are many that are interesting, but I would like to examine only one.
On page 9, the authors discuss why the UK and US will not default. They point to the fact that "large industrialized nations like the US and UK have made out just fine carrying a large debt load in the past." (pseudo-quote).
I would ask whether the US qualifies any longer as a "large industrialized nation?"
It is my overall opinion that the US will inflate its way out of debt, if it is allowed. This is a covert default. It may also not be allowed or fall into an aggravated state of affairs with the "nations" that appear to be its creditors.
It is also my opinion, that nations are devices set up by the Empire to entertain the masses with illusions like nationalism and the foreign devil.
It depends on what you mean by "industrialized".
If you mean the total market value of industrial goods produced, then yes, the US is industrialized, and large. I think China is just now surpassing the US here.
If by industrialized you mean "large and growing employment base in domestic manufacturing", then your question has more bite.
As always, with respect to debt, the question is cash flow, and the sustainability thereof. The diminishing manufacturing employment issue seems to me material, but not entirely dispositive. (Utterly dysfunctional and de-legitimized political class - that may be the dispositive issue).
And not to pursue you too gratuitously off topic, but if nationalism and the foreign devil are "illusions", then they are ancient and mighty ones - on par, I'd say, with the value of shiny soft yellow metal. Arguably intrinsic to the human condition, in other words.
If Empire in its vast conceit aspires to any role with respect to these illusions, it is to manage them, not manufacture them. IMHO.
I agree, this is a must read. A++
However, I do have many points of interest and conjecture.
Primarily, I don't understand Chancellor's double speak. He readily admits that inflation is in the cards vs a default for the US, but then turns at the end of the essay and posits further QE to the point of no return as a question. I do not understand this. How is inflation possible outside of further quantitative easing? (lenders aren't lending, and no one wants to borrow)
Also like most economists I think Chancellor fails to see the social mechanics surrounding and underlying the current problems. Inflation is a good fix, but what do you tell people, already massively unemployed as it is, that milk and gas is $7, and that everything is more expensive? How does this not end in social unrest? How does social unrest not further destabilize the economy?
Let's say the US and the UK don't default, in a vacuum, how do they finance themselves short of foreign investment as those countries previously investing fall to pieces?
Why does Chancellor look so keenly at the past, and miss the fact that after every great downturn in modern times has come a great war. (No I'm not talking about the corporate adventures currently ongoing in the sandbox either, much bigger.) How would these conflicts effect the default/inflation/hyperinflation scenarios?
Finally, and I know it's asking alot, but what are the known unknowns, let alone the unknown unknowns that are out there in the next few months to say decade? How do these effect his theories and models?
I give Chancellor an A++ looking through the rearview mirror, but toss in a dose of human nature, historical cycles, and look out the front windshield and I think we will find his excellent thesis is about to be run over by a socio-political tornado beyond the scope of economics to model to certainty. JMO.
Yes, the question should be asked, through what approach do you debase the currency and not exposure yourself to hyperinflation of default?
Why is this historic view of persistant bond market momentum, born of FED doctrine, always assumed when looking at US sovereign debt?
Why is the accepted solution one of debt peonage? I could say, well its unamerican, but really what I mean is it is unworkable. Especially, on a similiar time line to Japan.
Mark Beck
Does anyone know how much of our debt and liabilities are indexed to inflation (TIPS/Pension/Social Security, etc.)? How will we inflate our way out of those (besides defaulting on the "promises")?
Easy, the government figures the inflation rate to set those bond rates, and I bet it will never go over 3-4%.
And if you're really lucky we can have price controls to make sure it stays that way. Better get your ration coupon book early.
Many parts of CPI will be experiencing deflation, during a hyperinflation. For instance, in Weimar Germany, house prices went to essentially zero. The government, will, thus, rig the CPI to include ever-significantly large amounts of housing as part of the consumption basket, and thus, understate inflation experienced 'by the man on the street'.
Sort of the opposite of the past decade where hyperinflation in housing prices were explicitly excluded from CPI, much to the chagrin of many who legitimately argued that housing is the majority of an American's consumption basket, and that Owners Equivilant Rent understates the cost of homeownership for most Americans.
My 2 cents.... They could also achieve downward CPI adjustments by increasing the proportion of certain semi-luxury goods (ie: designer clothing) that will be falling in price very rapidly, relative to staple goods such as food and electricity.
Yeah, but what are Chancellor's credentials? Has he been awarded a Ph.D by a decent university?
Off-topic, but look at BP stock... WTF? Maybe if a dead cat can bounce a dead oil-drenched pelican can too?
Okay, I've been reading Zero Hedge for months now - and I agree with the general consensus here that the globalist/banker/CB ponzi scheme is due to fail eventually.
But the most important thing I can see is being able to tell when.
They must keep it going and so it will keep on going until it is exasperated and then collapses.
That being said, the only way anyone can benefit betting on its demise is if it dies sometime in the reasonable future.
If this does not occur before I die I might as well live on and profit in ignorant bliss rather than be right and very, very early (I really hate that).
Anybody got an answer for this?
How much rope do they have before they hang themselves? Anyone care to opine on some actual numbers regarding quantity and time?
Otherwise, you will die right and die poor.
Let's get totally real.
I wrote this earlier on another string. Just a thought...
There's considerable debate and questioning about what the end game will be - and when. Of course, it could always get "The Road" bad (so sh*tty people just kill themselves to get it over with), and gold won't matter at all. Or it could just be Depression bad. Hyperinflation v. deflation is a big debate. A collapse of a currency (IMHO) is effect both.
I would say there are a few constants: (1) have guns, bullets (even if just to trade), food, water, water filtration, supplies, and some things to barter with (wine, liquor, batteries, etc.) - imagine stores are no longer open and you can't buy anything for awhile; (2) community - get to know people so that they will defend you after you help them; (3) prepare for it, but don't obsess about it, you'll drive yourself mad; (4) don't talk to people about it unless asked or you think people might be open - most people don't want to hear it, and will just pretend you are nuts. I'm sure there are others, you can find lots of websites dedicated to survivalism.
20 years.
It seems to me that the machinations of "borrow and grow" are clearly coming to an end structurally. The machine will face asymptotic counter-force on it's own within 5-10 years. Some time before that, a flap of black swan wings will topple the whole beeatch. There's a list of 10-20 things that could happen tomorrow that could cause global credt to seize up. There's a f-load of tension between rich and poor, in $terms and information. There's a bitter former superpower for the world to deal with. (US, not Russia). It's a matter of recognizing general outcomes and preserving maximum options. Guns, ammo, monitored security, gold, silver, communications, information. Know your neighbors. Want to find a growth industry to preserve revenue? Try private security.
Thanks ZH- good stuff I would have never likely found
1800-WW1 UK example makes little sense given historical setting/colonialism/empire. The only similiarity is the colonial part - they used guns / US uses creative financial solutions. Timeline mismatch
Underlying premise assumes anglo monetary continuity in every outcome - e.g. creditors have little leverage. Time will tell if the US dictates the outcome or participates in a solution
Unaddressed is what the possible tradeoffs will be for the US in geopolitical terms (governance/SDR/etc) for an inflation "solution" - an ex anti outcome is a six sigma event. How do you fix a broken business model with the rise of a few billion and instant communication?
China entry into WTO was contingent on financial services dereg; JPM frantically trying to grow its presence there for reasons cited above. Paulson/Geithner passports say it all.
Great historical survey although maybe Reinhart/Rogoff should get that credit (gosh can't he fudge a few facts or look at "other truths" to make it seem less Northern-European biased?)
But then Chancellor brings us up to today, heading one of his last sections with: The US isn't on the verge of default (p.9) why? well, "in time, welfare and pension obligations will be reduced and taxes will rise." Really? Hey, that's a relief but do you mind showing us the math (or any supporting material) on that Edward?
Chancellor's big compare is Great Britain which, just after the Napoleonic wars, set a national debt/income all time world record (1820's) yet then managed to march on to economic glory, whacking that debt down steadily for the next 100 years. OK but in the 1820's the Brit's had just defeated Napoleon setting the stage for a century of global imperial dominance and industrial might. Sorry but if anything the US today is in just the opposite position. I take no comfort in that precedent.
Finally, in his When do governments default? section (p.2) I'd say for sure the following currently apply to the US: #2 Unwise lending - The federal government has just absorbed a staggering amount of bad RE loans from FRE, FNM and private lenders. #6 Rollover Risk US debt average weighted maturity has been reeled in a lot lately and #7 Weak revenue - Of course this is a risk for the US going forward, you can't just keep hitting the tax button forever and just maybe the economy slows a whole lot more and there isn't as much to tax.
Not too convincing on the US default risk analysis but I agree that inflation/hyper-inflation is more likely. We might get both!
just a thought,
when did the flat earth theory meet it's demise?
some still believe, so when is a relative related
to where and whom? as these change so does
the answer to when.
.
http://www.progressiveradionetwork.com/the-gary-null-show-wnye/2010/7/8/the-gary-null-show-070810.html
.
nancy banks. "deadly virus of international greed"....
.
re post above... rock, hard place and shark
jumping, appears confused and confusing.?
creating a ghetto don't come cheap, you have to
work at it?
" inflation redistributes wealth from creditors to borrowers in a relatively painless fashion."
.
that may be partially true for some creditors and
some borrowers, but it is entirely bullshit because
it misrepresents what inflation really does. and this
author knows it or should. disgusting fraud. first
understand we are speaking of fiat "money" born
of a promise made by a borrower and generated
out of nothing. this nothing is the wealth that the
creditor has to lose in inflation and this nothing is
the profit the borrower gains in inflation. so yea,
seems relatively painless. but the painful part comes
in when the borrower has to pay inflated prices in
the "market" with his devalued borrowed money that
he has promised to repay, with interest, to the creditor
who maintains the capacity to , out of nothing, generate
more fraudulent loans to himself or any one else he
deems worthy. even if he has seen his prior "wealth"
diminished due to inflation. or, the creditor may decide to opportunely deny further credit or roll over. good to
be the king / god, receiver of assets. with the power
of the creator, if you will.
i repeat, bullshit.
interest should go to the treasury and then no taxes
would need be levied, ever. we need a real federal
bank or state banks and the feds can beg the states
for finance or perform services the states agree need
be performed and then paid for. government by the
people or insane global casino fascism, pick one. ?
.
http://www.youtube.com/watch?v=nrbT5FWuTXs&feature=PlayList&p=AF4420DB3CD42DB3&playnext_from=PL&playnext=1&index=44
.
"i don't want no women who stay drunk all the time". e.j.
http://www.youtube.com/watch?v=_yNv4PrXbRI&feature=PlayList&p=AF4420DB3CD42DB3&playnext_from=PL&index=45&playnext=2
http://www.youtube.com/watch?v=-PdSe718Zcw&feature=PlayList&p=AF4420DB3CD42DB3&playnext_from=PL&index=55&playnext=11
Dear blindman mike:
We're making progress toward peace.
Late last week, Congressional leaders refused to offer the House and up-or-down vote on $33 billion more for war. Why? Because they knew that they wouldn't get it.
So instead, they engaged in arcane procedural maneuvering, resorting to a "self-executing rule" festooned with impenetrable amendments. When they have to go that low, you know something weird is happening.
Or something beautiful. And something beautiful is happening - despite the procedural legerdemain, 168 members of Congress voted in favor of an amendment to require "a plan by April 4, 2011 on the safe orderly and expeditious redeployment of U.s. troops from Afghanistan, including a timeframe for the completion of the redeployment."
In other words, there are now 168 votes for peace. More than ever before.
50 more votes, and we're done.
So keep watching your inbox, and answer the call. You might have to send an e-mail, sign a petition, or make a telephone call. Whatever it might be, make your voice heard, and this war will end.
We can do it.
Courage,
Alan Grayson
P.S. Here is a Roll Call of Honor, the ten Members of Congress who voted against the "self-executing rule," and in favor of all three amendments to end the war:
Duncan
Filner
Grijalva
Kucinich
Michaud
Napolitano
Paul
Pingree
And me.
.
post from the porch, political spam porch. it takes
"courage". someone said it, "moral courage".
http://www.youtube.com/watch?v=EAjLyDqmwdk&feature=related
.
you see? a certain community would prefer,
no, demands, your government remain a broken
pimp waiting for instruction and cash (think
interest collected on all of the money supply)
paying assignments. do you prefer lawless chaos
and endless lies and fraud? eternal terminal war?
maybe that is the best
thing, the best we can do, our best shot? hmm?
humanity's final achievement, wisdom of the ages
writ large.
is gw. bush speaking somewhere for large sums of money? or cheney? they seem to have fallen silent?
worms, yes, but professionals. years ago they spoke of
a vision thing. what was that about?
"In time, welfare and pension obligations will be reduced and taxes will rise."
Oh, really? Taxes will undoubtedly rise, but it will be interesting to see how the spending side plays out.
It is interesting that his analysis under #5 - "Tipping Points" - does not say much about reaching political tipping points. Nearly 20% of the US populace is substantially dependent on transfer payments from various governmental entities for their very subsistence, and another 30% of the US populace are substantially dependent on governmental entities to maintain their current standard of living. In an era of mass politics, so-called democracy, the ability to blunt the impact of these dependencies, much less to turn off the spigot, is dubious at best.
This is not your great-great-grandfather's UK, nor is it your grandfather's US, where most people actually accepted the fact that they had to work to feed themselves and perhaps had the hope that the government will help them get by. Nowadays there is an expectation that the government will help you get by. This time is indeed different.
Default? Perhaps not outright, but certainly by inflation. And I don't count on the ability of the political class to keep inflation contained at the sweet spot of 7% to 9%.
It might not be 1920s Weimar, but we shouldn't rule out a repeat of the 1970s.
Tyranny with a Happy Face ... Cue California Über Alles.
Really this is a great post from an expert and thank you very much for sharing this valuable information with us................. windows vps | cheap vps | forex vps | cheap hosting