Sovereign Defaults Coming in Second Stage of the Financial Crisis.

The first stage of the deflationary debt unwind resulted in massive consumer and corporate defaults, particularly in the financial sector. This sector being one and the same as the governments that it controls, the state has thrown all the resources that it had and did not have (pulled them out of thin air) in order to save its Banking sponsors.  While it has given the Banks the respite and saved many of them for now from going belly up, it did not solve a thing. The bad debts have simply been transfered to the Central Banks’ balance sheets that are expected to be later transferred to the taxpayers of each and every country. Whatever was not transfered was hidden by suspension of the mark-to-market accounting rules. Thus, the deflation that is not seen has not gone a way, but has been simply hidden and delayed. What now?

Now when the time comes in a few years and the junk on the CBs balance sheets will come to maturity and the losses will finally have to be recognized all the CBs’ balance sheets and the Governments whose Treasuries back them up will have to come to terms with the deflation that has already occurred, is occurrring now and is going to continue to occur until it runs its course. When that moment of recognition comes it will likely manifest itself in the form of a series of sovereign defaults (some of them in a chain reaction fashion). Dubai’s governments committment to back up its Dubai World real estate enterprise and its own subsequent failure to do so is just the first harbinger of these deflationary sovereign defaults. But make no mistake, it is neither the last one nor the biggest one. This is only a test. And even with this small fiasco over the Thanksgivings holiday weekend in US, what we saw looked powerful. The US Dollar carry trade did a bit of unwind by plunging EUR/USD from 1.5125 on Wednesday to 1.484 early on Friday. Gold plummeted in same time from near $1200 an ounce down to $1138, the oil reset as much as 7.1% to an intraday low of $72.39 from mid $77, all in a matter of hours, while US Treasuries jumped in a reverse action to the Stock Market indices 200 point plunge.

Deflation needs to happen, it is natural and it will happen, particularly in light of artificial speculative price increases on every investment class and consumer good that you can find that the criminal and illegal actions of the central banks caused by decades of currency debasements.

What we need is more defaults, more price drops, more speculators wiped out. The ideal solution would be toppling of the entire financial system based on fraud and crime even according to the laws written by the politicians now in charge (as en extension of the wishes of their sponsors). When political systems fall, they tend to result in physical elimination of at least of some of the parasitical politicians and their supporters. If this were to happen, it would be the deflation to remember. But it would also make the lives of the ordinary people a lot easier as cost of living would plunge, the politics of taxation (expropriation) and inflation would be ended and the people could breathe easier again.

Deflation is going to save us by ridding us of the parasitical forces that we can’t throw off our backs on our own.


  1. Posted November 28, 2009 at 1:56 am | Permalink

    I enjoyed the post by the way….

    The biggest problem with your theory – it will never happen. Well, let me rephrase that. It won’t happen anytime soon. The US government as well as many others have decided there is no way they will allow any serious failure. Too bad really, we would be much further through all of this if they would. But the truth is NOBODY wants this to happen on their watch.

    I agree, and it will happen…..someday. But in the mean time, we will slap a few more bandaids on the issue, and hope it goes away.


    • Posted November 29, 2009 at 12:17 am | Permalink

      Whatever people say will not happen will happen. Soviet Union fell apart. Berlin wall came down. Saddam Hussein is not in power. World Trade Center towers have been destroyed – the unthinkable “in our time and on our watch”. When changes happen they are not anticipated by 99.9% of the people who are not prepared for them either. The US Debt load has been doubling every ten years for many decades now. It stands at $57 Trillion today in 2009. Do you think in 2019 it will be $114 Trillion and nothing will change?

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