Things That Make You Go Hmmm - Such As The Similarities Between The Eruption Of Mount Vesuvius And Government Bond Yields

Tyler Durden's picture

The latest from Grant Williams is another must read:

The reward for lending money to various sovereign governments around the world is ridiculous based on the amount of risk involved in doing so. At one end of the scale you have the juicy 44% yield for lending money to Greece which, let’s face it, is done. At the other end of the scale you can get basically nothing for lending money to the governments with the poorest balance sheets on the face of the planet. Your choices? Japan with its 200% debt-to-GDP and dying economy? Europe, which will likely no longer exist in its present form come the end of 2012 and which has broadened it’s accumulation of debt from the worthless kind issued by Greece to the severely dubious varieties issued by Spain and Italy (with France just waiting to be put into the game)? Or how about the United States? With its $14 trillion (and rising) deficit, it’s bloated balance sheet of toxic assets, its inestimable unfunded liabilities and its paralyzed political process? Some choice. And yet, people continue to flock to these perceived safe havens largely because, over the years, they have become used to doing so. At some point they will figure out that the ‘safety’ offered by government bonds is now a phantasm and when they do, you can be sure their awakening will be felt across the world. As fire and ash billowed into the skies over Pompeii and Herclaneum all those years ago, the terrified citizens below poured into the safety of their cellars where they had always sought protection previously. Only this time it WAS different and the cellars that had always offered them shelter from the storm became their tombs; proving conclusively that what may well have afforded protection in the past, may not do so in the future. Sadly, the 20,000 people living at the foot of Mount Vesuvius found that out the hard way. 1932 years after arguably the most storied of volcanic eruptions in history, at the foot of a volcano that still smoulders but, despite an eruption in 1944, hasn’t had a major eruption since 1631, 700,000 people now reside.

Full note (pdf)


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I think I need to buy a gun's picture

alot of earth wind and fire lately

baby_BLYTHE's picture

indeed, tonight we drink ourselves into a fucking coma!

END the FED already, give the people back their liberties so that we can start a recovery of epic historical proportations with sound money backed by Gold and Silver. When Currency

It might sound crazy, but it just might work, put all these TBTF, hedge fund hyenas and Warren Buffetts out of business. Best of all, not a single thread of lesislation needs passage. These laws/ideals have been on the books already for 235 years+. 

Dr. Engali's picture

It will never happen. They will never "give " the people back their liberties. We have to take them back ourselves. Unfortunatly there are too many people asleep that believe they are free. Until they wake up we will be stuck with the criminal system we have.

Until that day....

Caviar Emptor's picture

Freedom is something that's earned. 

Manthong's picture
"Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children's children what it was once like in the United States where men were free."
Ronald Reagan

I have been feeling an awful lot like a dinosaur lately.

Libertarian777's picture

The price of freedom is eternal vigilance. Something Americans have forgotten.

snowball777's picture

What did Raygun pass down to me beyond a destroyed middle class, a gutted CA university system, and 33% of GDP increase to the national debt?

Fuck that blowhard B actor wannabe.

Smiddywesson's picture

Except for the social issues used to distract us, I don't see much difference between Reagan, Bush, Clinton, Bush, and Obama.

Yes, prior to Reagan, discretionary spending was under control, but since his time it was out of control, even under Clinton.  This is not a partisan issue.  The rope is around our necks and neither party can remove it.

snowball777's picture

I completely agree. Different shades of self-destructively stupid. I do disagree on the "prior to Reagan" part though...we have a much longer history of ill-advised spending, Ronny just kicked it into overdrive and we've never looked back.

baby_BLYTHE's picture

ur correct that America won't be correcting itself until the innevitable day TSHTF, which will force upon the entire nation the ultimate decisions of what kind of country we want this to be for the next hundred years.

Finishing my earlier point, if currency outstanding was based upon only the supply/demand of gold & Silver mined annually, it would no doubt put the FED out of exsistence as Ron Paul and other Austrians have emphasized .

Introducing the concept of sound money. Economic structure woudl soon shift from wild speculation to capital formation. The simple concept and necessity for a Gold (sound money) standard is very simpily: the outstanding currency in supply historically could never compete with the amount of metal mined. The supply of outstanding credits always contracts in realtive terms of value against the amount of precious metals mined. This mechonizim completely constrains the likes of Bernanke and other central bankers who could not disguise the reality of M3 (money supply outstanding) against the amount of precious metal trading in direction competetion with the fiat reserves.

Caviar Emptor's picture

When the party ends there's always that stale-beer-in-the-carpet smell. And the crumbs all over the couch. And the hangover. And the bombed crasher sleeping in the bathtub. 

We're at that point, after the 'shop till ya drop' and 'mint till ya squint' party of the last 30 years. Nothing sound or healthy about it. Nothing balanced or prudent. Just a bloody mess to clean up. Thank you, supply-siders. 

Dr. Engali's picture

You're preaching to the choir about sound money. My fears are that, like Argentina, the very people who caused the problem will end up in power again.

snowball777's picture

Wishful thinking in the extreme; best of luck attempting to convince the entitlement state that what it really needs is to be crucified on a "cross of gold".

You may want to clean up that fairydust on your nose.

Smiddywesson's picture

Finishing my earlier point, if currency outstanding was based upon only the supply/demand of gold & Silver mined annually, it would no doubt put the FED out of exsistence as Ron Paul and other Austrians have emphasized .

One of the arguments against a gold standard is that there isn't enough gold out there to back the amount of fiat circulating in the world.  However, I think this argument ignores that all fiat could be pegged to the price of gold, and the price of gold could be set by the international banking community, to expand or contract based on the money needs of the monetary system.  That would be a very convenient system for those that held most of the world's gold and for the people who set the price of gold, to say nothing about their friends who would benefit from knowing where those prices would go next.

There's a chance that's the plan.  Some sort of system where trade is settled in gold, but gold is what floats, not the individual currencies.  Under such a system, the actual physical supply of gold is not an obstacle, because the international banking community can just ramp the prices of gold to justify more currency production.

All we know for sure is, the central banks are moving towards a gold related standard, and it won't be a true gold standard.

mess nonster's picture

Hey write,

"...all fiat could be pegged to the price of gold, and the price of gold could be set by the international banking community, to expand or contract based on the money needs of the monetary system."

Excuse me, but don't bankers "expand or contract" money supply based on their own needs,(rather than the "needs" of the monetary system) or rather "need", namely, the need to subjugate and enslave the rest of the world?

WonderDawg's picture

lesislation... typing with a slur is a sure sign of drunkeness haha. Turn one up for me while I find my lighter.

TheFourthStooge-ing's picture

indeed, tonight we drink ourselves into a fucking coma!

I've always been more partial to bakery, myself.

Cheesy Bastard's picture

What a bunch of kiss ashes.

Caviar Emptor's picture

Owning risky soveriegn bonds: A little like.....

Taking a nice afternoon nap in Pompei on Augusr 24th, 79AD....

...or going for a brief workout sea-kayaking in the ocean near Fukushima on March 11th, 2011...

....or having a diet-conscious breakfast at Windows on The World, One World Trade Center, on September 11th, 2001...

...or moonlighting as a guard at The Bastille on July 14th, 1789....

...or being the lucky standby passenger to get on board The Hindenburg on May 6th 1937...

Big Ben's picture

The difference is that with Pompeii, Fukushima, WTC 9.11, the Bastille, or the Hindenberg it wasn't necessarily obvious that something bad was about to happen. (OK, with Pompeii and the Bastille there were some rumblings that might have given some warning ahead of time. But it wasn't absolutely certain that S was about to HTF).

With sovereign bonds it should be completely obvious to anyone with half a wit that lots of these are not going to be repaid. Yet people keep buying them anyway. It seems that the one inescapble conclusion you get from studying history is that no one ever pays any attention to history.

Caviar Emptor's picture

What they all have in common is that sudden, Wile E Coyote moment just when everything seemed to going right

snowball777's picture

9/11 and the Hindenberg were also completely avoidable tragedies. There are very few genuine accidents.

AUD's picture

Or being some poor bastard stuck in Tripoli right now with US bombs falling on your head.

CrashisOptimistic's picture

Vesuvius is a fascinating event.

Pliny the Elder and Pliny the Younger had their moments and are now immortal because of it.

Brief story.  Pliny the Elder was a Roman admiral of the navy and was vacationing at an island offshore where his sister and her son kept house for him.  The mountain kicked off and he, like any fine naval officer, commanded the small squadron he had with him to raise sail and head for shore to rescue Roman citizens.  He got there after the eruption had been ongoing for several days and went ashore to direct evacuation.  While ashore, the volcano's column (the vertical column of material being thrown skyward) ran out of gas and collapsed.  

Pliny the Elder got caught in the collapse and died.  A brave death, doing noble deeds.

His nephew, back on the island, was studiously recording on paper every observation of the volcano he could.  The material, the pumice, was less dense than water so it covered the bay between his island and the volcano.  When the column collapsed, the superheated material started walking out across the bay on top of the floating pumice, coming for him and his mom.

He grabbed her AND HIS WRITINGS and they sprinted for the other side of the island.  They survived.  His observations have stood the test of history as description of what such an eruption looks like and they are now called Plinian Eruptions after him.


Smiddywesson's picture

I heard part of that story before, but that was great, esp the part about the superheated gasses spreading out across the waters, overtaking and killing the people on ship who thought they had made it to safety.  It is very vivid.

TheFourthStooge-ing's picture

Pyroclastic flows exterminate all in their path. They are superheated flows of rock and poison gas (up to 1830 degrees F/ 1000 degrees C) moving at speeds up to 450MPH (700 km/h). Those ships at sea most likely were incinerated like dried tinder.


oobrien's picture

I know I'm crazy.  But i still see deflation ruling the day.

Look at Japan.  What's the yield on their bonds?

This is going to be a long hard slog.

Smiddywesson's picture

Japan was a flat tire on an 18 wheeler:

Japan was one country in a global economic BOOM

Japan was before the world economy was completely global

Japan had trillions in domestic savings

Today, all the tires are flat and the cab of the truck is on fire.  The central banks of the world are broke, as well as the big banks, housing, jobs, and soverign governments.  TPTB do not intend to step down from power.  Therefore, they are willing to completely destroy the old system to buy time to set up a new system.  Now, tell me how that resembles Japan?

Your analysis might hold water for one isolated country with lots of savings and staying power, but not in this situation.  Your argument resembles someone telling a group of hikers gunned down in an area with no medical help in sight that will all make it because you once saw a veggie on life support.  Help is not coming, they are not going to make it. 

Either the system is coming down or they successfully hit the reset.

AUD's picture

This 'safety' arguement is bogus & leads to erroneous conclusions.

The 'big' players are not into safety but profit & falling yields are enormous profits, since bond yields are inverse to price. I find it incredible that supposed financial 'experts' like Grant Williams are unaware of this.

You are not getting "basically nothing" at all, rather exceptional profits on what are marketable securities.

Big Ben's picture

I'm sure the 'big' players made enormous profits on Greek bonds. Until they didn't. Just like Countrywide and other banks made huge profits on subprime home loans. Until they didn't.

The 'big' players in many cases are gambling with other people's money. When they win, they take a big slice of the winnings. And they never lose because it isn't their money that they are gambling with.

AUD's picture

Yeah, so what? That doesn't change my point.

The 'big' players will continue to to make enormous profits on UST's & other 'benchmark' bonds until they don't.

My point was that this 'safety' meme is a crock of shit & it leads to erroneous conclusions.

Big Ben's picture

The safety argument leads to the conclusion that investing in government debt is eventually going to lead to enormous losses for someone. If that doesn't concern you, then by all means, go ahead and invest in UST's. I think that interest rates will continue to go down until one fine day something will rattle the markets and they will start to jump. And all those paper profits that you made when interest rates were falling will vanish in a puff of smoke.

It is just like what happened with housing prices or dot com stocks. They just kept going up and up because money managers kept piling into them because they were going up. And then one day they started to crash. I don't think anyone really knows why they crashed when they did. Why not a year earlier or a year later? I really wish I knew. But they certainly went down a lot faster than they went up.

snowball777's picture

There are only "enormous profits" if you bought the bonds at high yields and are selling them now, which is not the case. And "marketable" is transitory too...a bubble is a bubble...until it's a pile of soap on the ground.

AUD's picture

The safety argument leads to the conclusion that investing in government debt is eventually going to lead to enormous losses for someone

You have it backwards mate. The safety argument leads to the conclusion that government bonds are safe. This is erroneous.

But getting back to the original article, people - at least the 'big' players - are not buying government bonds for 'safety', they are buying them for profit as government bond prices are rising. Thus the low yield means nothing. Halving the yield more or less doubles the bond price.

rwe2late's picture

AUD, so if I understand what you are saying,

 The "safety" is ultimately only that government (fed government) can nominally cover the bond by printing more money. Of course, given inflation, all the 'safety-minded' investors who are not bond-flippers are paying the government just to hold their money.

The 'big' investors (no doubt with collusion and insider info) buy lo and sell hi, flipping bonds for profit. Presumably, should they ever be unable to flip the bond at a profit, the government will step in as a back-stop buyer.

Thus the government bond market can be described as a combination con/ponzi/ bailout racket.


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snowball777's picture


"The combined attacks come just two weeks before the German constitutional court rules on the legality of the various bailout policies. The verdict is expected on September 7."

The best explanation for Ben's punt to Sept 20th to date.



Libertarian777's picture

Does that PDF link work for anyone?

Smiddywesson's picture

But, but...Robert Prechter says EVERYBODY will flock to treasuries in a deflation and gold will crash.

He's got to be right, he charges a lot for his advice.

Akrunner907's picture

Hmmmm, I smell a new derivative product...............A bond hedge based on the eruption cycle of volcanos. 

PulauHantu29's picture

Demise of the Dollar by Addison Wiggins is a great primer in simple language how (and why) these sovereigns may default or inflate their debts away:

Excellent article here from ZH...thanks!

SuSpencer's picture

History Channel Europe just ran a program on Mt. V and put the number of people who would be immediately deaded at about 3 million.  They have an evac plan, but it's for a burp, not a boom, because there is no way to get people out of the way if it really goes again.;jsessionid=DE9020F23875DEB6C739A355A5064DC2


On the upside, it would take some off the unemployement rolls, and just think of the reconstruction boost to the Italian economy!

This is Keynesian taken to the next level, bitchez!



Tater Salad's picture

So funny to read every post that thinks inflation is locked and loaded.  Get a grip.  We're so inflationary that we had QE1, nothing...QE2, more nothing and now we need QE3 and oil is way, way off its highs with all of this liquidity sloshing around.  Just because dollars are printed doesn't mean those same dollars carry any velocity, infact quite the opposite right now.

As for Treasuries and how they're the boogy man, rubbish people.  They're the best looking girl at the ugly dance.  And, the uber wealthy, institutions, pensions, etc. buy them for convexity...if you think they're buying for coupon value your an idiot.

Deflation bitchez!  End of story!


PulauHantu29's picture

"Germany will either have massive banking losses (see below) or assume some debt. Why give up the dream of a united Europe over a few trillion and your credit rating? Yet (Ambrose Evans-Pritchard writing in the Telegraph):"

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