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Eurozone Being Swallowed by Expanding Debt Black Holes, Mega Bond Market Profits and Default Booms

Interest-Rates / Eurozone Debt Crisis Nov 28, 2011 - 04:41 AM GMT

By: Nadeem_Walayat


Diamond Rated - Best Financial Markets Analysis ArticleThe stock markets plunged last week and euro-zone bond market volatility increased with PIIGS yields spiking to new Euro highs as pressure mounts on the ECB to start printing money to monetize bankrupting PIIGS debt that effectively act as expanding debt black holes that threaten to swallow first the whole of the Eurozone and soon after collapse the worlds financial system.

The pressure cooker reached a new extreme with the apparent shock of the FAILURE of a German Bund auction as the eurozone debt crisis contagion appeared to have spread to Germany as it experienced its worst bond auction since the launch of the Euro in failing to sell some 2/3rds of a routine auction which the mainstream press took as evidence of the flight of capital from the euro-zone accelerating on risks of announcements for a Euro-bond and the start of inevitable money printing of several trillions of euros as I have warned of several times over the year as being inevitable, where the longer the delay will result in more desperate actions.

However the facts of the German bond auction failure are more to do with German greed than imminent euro-zone contagion, as Germany has sought to benefit from the internal flight of capital by offering its bonds at successfully lower interest rates culminating in the record low yield offering of just 1.98%, a rate which is in the face of 3% Inflation which the bond markets were just not able to stomach, so in reality it is a technical failure and nothing akin to that which has hit the PIIGS and lately spreading to hit France and Belgium.

The Germans continue to resist out right money printing and implementation of Euro bonds because they know where it will lead to, i.e. lazy southern states that constantly spend far beyond their means (tax revenues) will put ever greater pressure on the ECB to print ever greater amounts of euros this resulting in ever higher annual inflation rates until the whole eurozone resembles what the likes of Greece, Italy and Spain were before they joined the Euro, i.e. basket case high inflation economies that rely on euro-zone core to finance government spending.

The problem with euro-zone is that in its present form it is actually such a hard a currency when compared against the money printers such as the UK, US and Japan, that it is threatening to blow apart under the pressure of being too strict in terms of relative monetary policy.

For instance the ECB purports to cleanse its bond purchase of PIIGS debt by selling other debt and assets, when it should be printing money to monetize the debt as other soft currencies are doing, i.e. acting to relieve the building pressure instead of being too hard and too strict the Euro-zone continues to be pushed towards the abyss because there is no real mechanism for dealing with the internal imbalances between the PIIGS and the likes of Germany the consequences of which are playing out in the euro-zone bond markets.

The solution remains as I voiced near 2 years ago at the very start of the current phase of the inflation mega-trend which is that governments have no choice but to print money and monetize debt that will result in a decade long high inflation for ALL currency blocks (See January 2010 The Inflation Mega-trend Ebook (FREE DOWNLOAD), so regardless of where the Eurozone stands today it will also eventually end up as being a high inflation money printing debt monetizing economic block.

The Eurozone crisis illustrates a key point that fails to register with many market commentators and that is that the right to print money by sovereign states is a major advantage, the lack of the ability to print money is a major flaw in the Euro that needs to be corrected which probably does mean implementation of a Euro Bond. Which is why US and UK debt yields are hitting record lows whilst Italy 10 year bonds are spiking above 7% against Britain with similar level of indebtedness currently stands at just 2.20%. which is because Britain can print as much money as it needs to, whilst Italy cannot print a single Euro! Therefore the Eurozone has effectively crippled all of the PIIGS and put them at a fundamental disadvantage compared to countries outside of the Eurozone - ALL to the advantage of Germany which gets record low interest rates AND a weak currency to feed its exports revenue generating machine.

Remember that there is no solution that does not deal with the core problem which is that countries such as Greece continue to accumulate more debt whilst the economy contracts thus continues to maintain a large budget deficit which means debt to GDP continues to trend higher, and well above 100% towards 200% and bankruptcy.

Structural flaws in the eurozone remain as I discussed well over a year ago in May 2010 (11 May 2010 - E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt) . Long before the mainstream press and BlogosFear that Germany is effectively bankrupting ALL of the eurozone because they cannot compete it, so my solution was and remains for Germany to leave the eurozone. The contagion is spreading from Greece that is consuming all of the other PIIGS, and lately Italy with France seeing its borrowing rates soar to their widest spread against German Bund's in a decade.

The Case of Italy

ECB is putting pressure on Italy to adopt economic austerity, by holding off on buying bonds and pushing Italian yields back below 6%, last trade was at 7% after having spiked to 7.5%.

ESFS Bailout Fund Busted
The agreed fund of 440 billion Euros guaranteed on the back of Germany has already seen Euro 150 billion committed to Greece, Portugal and Ireland, with 106 billion committed to the support of the banking sector, leaving a balance of just 184 billion (of funds yet to materialise) which cannot cover Italy's Euro 1.4 trillion of debt, never mind Spain which combined would be looking at financing of at least Euro 400 billion per year. Therefore the Euro 1 trillion announced bailout fund without details now will need to materialise in detail as there already is a financing hole of at least Euro 216 billion for just Italy and Spain, never mind further support for the remaining PIIGS and the banking sector, collectively this would consume an approx 500 billion over just 2012, and probably a similar amount for 2013 therefore confirming my expectations for an ultimate bailout fund in the region of Euro 2-3 trillion to just stabilise the Euro-zone against the prospects of collapse of the Euro-zone banking system and thereby the whole world's banking system.

Again the only solution is for the central banks to print money and monetize debt. That is what the ECB will do which will feed the euro-zones inflation mega-trend just as Britains money printing starting in March 2009 has fed the UK's inflation mega-trend pushing inflation indices to 20 year highs.

Invest in Italian Bonds?
With italian bonds yielding 7.22% fro 10 year, 7.65% 5 year and 7.28% for 2 year, it can be quite enticing for investors to contemplate buying at such deep discounts. However the problem is how confident can one be that these yields won't rise still higher to above 7.5%, especially as 6% was supposed to be have been the danger level and 7% the critical bailout level.

The point is that financing costs of above 6% are not sustainable in terms of debt interest payments that risks triggering an exponential debt interest spiral that ensures ever higher yields all the way to default, just as has taken place with Greece and likely to take place with at least Portugal and Ireland. Therefore Italy is at that critical point where it has only a few months to get the yields lower before significant amount of debt starts to be sold at ever higher yields.

In this respect Italy is seeking to finance approx Euro 25 billion during the remainder of 2011, with 2012 seeing a sizable Euro 350 billion of bonds marketed most of which will be during the first half of 2012, so Italy does not have a year or two to sort itself out it has perhaps three months at most and this is the risk that investors need to contemplate, in which respect I am not willing to put my own money on the line for this risk, i.e. that I would effectively be taking an approx 25% risk on capital against a potential return of 7%, plus a one off capital gain of 10%  so 17.25% potential against a 25% risk (before tax, currency and inflation), against UK 2.25% where the effective risk is inflation as the UK is stealth defaulting by means of high inflation, so outright default is an extremely low probability.
The problem is Italy should really be paying about 7-8% anyway IF it were outside of the eurozone and printing money resulting in high inflation.

Therefore without the ability to print money Italy will default on its debts which means someone is going to have to print money and monetize Italy's debt, who ? the ECB is the only real candidate to do so, this will result in higher eurozone inflation, especially when  France comes knocking on the ECB's bailout door.

So far Germany has prevented the ECB from printing money proper along the lines if the UK and USA, how long will Germany hold out on money printing. My view as it has remained for approaching 3 years now and as illustrated in the conclusion of the Inflation Mega-tend ebook that all governments will print money to monetize debt which will result in decade long high inflation.

My last analysis estimated money printing of Euro 2-3 trillion, which given the euro-zone debt dynamics remains as the likely amount to agree to at this point in time, though the longer the Eurozone delays in printing money and monetizing debt, then the debt crisis contagion will mean a higher eventual bill, for instance if the eurozone continues as it has done for the past year to delay and muddle through with half measures then the bailout money printing bill will have risen to more like 4  trillion euro's, so time is critical.

Off course there is a price for money printing and that is INFLATION, which you CAN relatively easily hedge against inflation in virtually any asset that CANNOT be printed , that's precious metals, commodities, land and housing (yes you have to do your research because land and housing are location dependant) or paper assets that are leveraged to inflation such as dividend increasing stocks and inflation linked government bonds (which are subject to inaccurate inflation indices that consistently under reported real inflation)

As euro-zone core countries are consumed by the debt contagion black holes then so will countries such as Germany experience their own soaring interest rates, which will prompt Germany to panic and start money printing and monetize its own debt and thereby will be the trigger for huge Eurozone wide money printing inflation.

Bankrupting Sovereign Bond Market Mega-Profit Opportunities

Whilst the mainstream press focuses on the bankrupting PIIGS the rest of the bankrupting sovereign states outside of the eurozone continue to fly under the radar, as illustrated by smug politicians in the UK attempting to lecture Europe on how to solve its debt crisis. However as the following table illustrates the debt crisis is likely to come knocking on the doors of the UK and Japan sooner rather than later.

Country Total Debt (Public+Private) % GDP 10 Year Bond Yield


UK and Japanese government bonds are grossly over valued and on the precipice of moves resulting in sharply higher interest rates (yields). The bottom line is that the UK Gilt has reached its safe haven status peak that is being artificially supported by the Bank of England money printing (electronically) to buy government bonds which is resulting in very high inflation, and because the bond markets are manipulated by artificial buying then this will have to ultimately have to play itself out in the currency markets which implies a sharply lower sterling exchange rate even against an exploding euro, though note that ALL currencies are in FREE FALL against one another, it all depends on the relative rate of free fall as measured by the real rates of inflation which for the UK is approx 7%.

People of Britain sit up and take notice, the UK is in a far worse debt position than virtually every major western nation, whilst Italy is making the headlines today, then where the PIIGS are today the rest will eventually follow, that's the UK and Japan first and eventually France, Germany, US, ALL of these countries bond markets are trading at or near record low interest rates. This gives investors a series of opportunities of the decade to profit from the inevitable by shorting bonds of first the UK, then Japan, France, Germany and finally the United States, which given the debt mountains the magnitude of profit potential is likely to be huge, nearly as large as for those that shorted Greek bonds 2 years ago.

In terms of the sequence of which bond market is likely to explode sooner rather than later, then I would rank the UK and Japan as the prime candidates to join their PIIGS brethren with soaring interest rates and collapsing bond markets, this collapse in market confidence and prices will likely take place within a matter of weeks that could be triggered at any time by ironically good news out of the euro-zone as that would switch the global bond markets attention to the fact that the UK and Japan are just as bankrupt as any of the PIIGS, and as we have seen with the PIIGS, a sequence of financial shockwave's could result in a collapse of the Coalition Government. This is not idle speculation but a trend that is in motion which I will expand upon in my next in-depth analysis as to its consequences.

Again Take Note, PIIGS Sitting on Interest rates of between 6% to 7.5% have similar or even smaller debt mountains to that of the UK, Japan, France, Germany and USA, which means that this is the normal market interest rate range for western bond markets. Japanese Bonds sitting at 1% are the short of the decade, UK bonds sitting on 2.20% are the short of the decade, German bonds sitting at 2.20% are the short of the decade, US bonds sitting on 1.90% are the short of the decade.......

The Sovereign Debt Crisis and the Inflation Megatrend
If you recognise the fact that the primary economic lever at disposal of governments and central banks is INFLATION, then you will begin to understand how the global economic system really works and not as vested interest academics want to model of how it should work.

The bottom line is that Governments NEED inflation. They need inflation to BUY votes, they do this by printing money or debt. There are a multitude of mechanisms that governments employ to print money from the fractional reserve banking system creating credit, to governments printing debt, to governments printing electronic money to monetize their debt, to governments printing bank notes.

This debt be it banking sector, private or government is devalued by INFLATION, the higher the the inflation the more votes governments can buy.

What cash obsessed deflationistas' FAIL to understand is that the governments will not allow deflation to take place, they can and WILL FORCE YOU TO SPEND YOUR SAVINGS, How ? By using INFLATION. They will PUSH inflation ever higher until you SPEND YOUR EARNINGS, LIQUIDATE YOUR SAVINGS, else you will LOSE ALL OF YOUR HARD EARNED WEALTH.

This is the exact experience for those in the UK, where after tax even on the official CPI that is at least 2% below real inflation, UK savers are losing approx 3% per annum of the value of their savings. How long are you going to save for if you are losing 3-5% of the value of your savings. Your going to move your cash out of deposits and into capital investments or consumption, this is called increasing the velocity of money, it's just that governments love inflation so much that they get carried away and inflation runs far ahead of anything that anyone ever imagined it would be.

So whilst volatility in the stock market may be high, I know that in the long-run my portfolio of dividend increasing stocks will HEDGE me against the Inflation Mega-trend.

The current eurozone debt crisis is as a consequence of the inability of the bankrupting PIIGS to print money, something they gave up because they wanted a stable currency instead of a currency that is destined to wipe out all savings every 10 years. So these stealth defaulting states did make the right decision for joining the Euro, but the error is in the design of the euro-zone for it is not a properly functioning currency because it does not allow for stealth default for bankrupt states by virtue of the German fear of hyperinflation instead it is designed to be ANTI INFLATION MEGA-TREND for as long as Germany does not economically suffer, for if Germany suffers then Inflation is back on the menu! but as I explained earlier the worlds financial system is designed to be inflationary, this means that either the ECB PRINTS MONEY and monetize's debts and therefore feeds the Eurozone inflation mega-trend OR the PIIGS default on their debts AND STAY in the Euro so as to replicate aspects of the Inflation Megatrend boom bust business cycle, though with far greater monetary stability than the PIIGS usually experience because of their German fiat currency anchor.

This is what those in charge of the Eurozone need to recognise and implement, i.e. mechanisms for periodic orderly defaults of states in line with the business cycle, which is the ultimate solution to the crisis's that I expect and which supports my ongoing analysis that Greece will default on its debts AND stay within in the Eurozone.

Economic Boom Soon Follows Debt Default

The best solution for the debt crisis is for bankrupt countries to have a short-sharp shock to default on total debt, get the economic contraction out of the way,shrink the public sector and then out of the pain implement sound government spending policies which will ignite the next economic boom.

Why economic boom when every one is obsessing over economic collapse ?

Because the markets DISCOUNT THE FUTURE, the panic plunge of asset prices as a consequence of the debt default and economic contraction will present investors with buying opportunities of the decade! As investment floods in, especially when the the Euro with Germany behind is relatively stable, compared to what would happen to the likes of the Drachma, and Lira, which means cheap assets, no debt, small public sector, low wages and relatively stable inflation, what more could investors ask for?

Therefore the economy then booms, and a few years down the road governments again start to increase spending and the size of the public sector as governments borrowing once more goes out of control and the economy goes bust, and so repeats the boom bust cycle, however in the meantime investors and workers profit and prosper.

So don't write off the bankrupting PIIGS for if they do have their debt cleansed, and shrink their public sector and wages to a competitive level then watch their economies BOOM for MANY YEARS! (depending on the competency of their governments to not mess things up, as not all countries governments have shown themselves to be equally competent, for instance Ireland and Spain appear to be more competent than Greece and Italy which has been in a growth recession for nearly as long as Japan as a consequence of NOT defaulting on its debts many years ago).

Protect Your Deposits Against Collapse of the Banking System

Meanwhile take note of my preceding articles warning to protect your deposits, not because I think that the euro-zone will collapse, but because the risk of collapse is NOT ZERO, therefore the risk of loss of funds deposited in any UK bank is NOT ZERO, as once the euro-zone collapses it will likely take the whole global financial system down with it, so you need to protect your deposits by ensuring you are within the FSCS limit of £85k per banking licence group.

Whilst actual loss of funds is a very low probability, what is more probable during an unfolding crisis is that deposits in Euro-zone banks are frozen, therefore I would be reluctant to hold any funds in a euro-zone linked bank no matter how much propaganda is pumped to pretend that their UK arm is separate and in no way connected to their group head office in for instance in Spain, as after accounts are frozen it will be too late to wish you had acted when you had the chance to do so.... more steps on protecting your deposits - Savers Protect Your Deposits From Bankrupting Banks and Quantitative Inflation.

I still stand by my long standing conclusion that Germany will leave the Eurozone and the Eurozone will print trillions to prevent a banking system collapse, both of these outcomes will feed the Inflation mega-trend.

More on the Inflation Mega-trend in my next newsletter, ensure you are subscribed to my always FREE Newsletter to get this in depth analysis in your email in box.

Your UK Bond market shorting, pulling funds out of euro-zone banks analyst.

Source and Comments:

By Nadeem Walayat

Copyright © 2005-2011 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


rich freeman
28 Nov 11, 10:17


Great article as always. Given you ongoing belief of inflation, would appreciate your overview on dow? Do you still see this at new highs by year end / Q1 2012?



28 Nov 11, 11:18
shorting bonds

Hi Nadeem,

How can you short bonds?


28 Nov 11, 15:50

What's great about this irrespnsible article? Encouraging debt monteisation and inflation for all at the hands of the wreckless and feckless. I'm tired of being impoverished by others greed and stupidity. The BOEs ability to devalue my £ has slashed my income and ruined my life, and all the author can say is let's have more of it for everyone.

28 Nov 11, 16:14
Probable Forecast


It's a forecast for what is the most probable outcome, what the powers that be are likely to do in response to what they face.

If you know what is likely to come, then you can leverage yourself to inflation mega-trend, else you can pretend it does not exist and lose the total value of your savings over the next 10 years.



Terry H
28 Nov 11, 21:15
Bear Market

So bear markets in equities have been banned by govt.Reminds me of a Mr GB who used to talk about how he had also managed to overcome a certain cycle.

28 Nov 11, 21:39
Balanced Portfolio

Hi Nadeem,

Would you still recommend some bond exposure for a balanced portfolio? I agree that US bonds are probably nearing a reversal in the long-term trend, but shorting bonds the last couple years has been a loosing trade for many. In my opinion being long equities and short bonds leaves an investor very vulnerable to a continued economic slowdown in the short to intermediate term.

Do you think investments in Canadian government bonds and Canadian corporate bonds are good for the intermediate to long term?

Thanks and looking forward to your articles during these interesting times.

28 Nov 11, 21:54

Positions should be for the long-run, because short-term volatiltiy is and will be high, however the long run is suggesting that yields for UK bonds will move significantly higher because mega-inflation is coming, perhaps not durign most of 2012 but its coming..... which my next article will take a peek into.

I don't know enough to comment on Canada.



28 Nov 11, 22:01
some questions

Hi Nadeem

Raj has asked an interesting question.

How small private investor can short Japan, UK and other bonds?

My other questions would be regarding your last post:

How can you leverage yourself to inflation mega trend?

What inflation do you predict on yearly basis?


28 Nov 11, 22:38
your latest thoughts on US stock market

Hi Nadeem,

Can you comment on your latest thoughts on US stock market.

Are we still looking for bull market highs in Q4/11 or Q1/12 time frames or Trend is changing because of the euro crisis.



29 Nov 11, 01:24
fixed mortgage rates


Excellent article.

Could you please explain how 5 year fixed mortgage rates are determined? For example; are they determined by the 5 year gilt rate, ten year gilt rate or the US bond markets?

I only ask because if UK market rates are on the verge of going up, I want to know what the consequences could be for fixed rate mortgages. Therefore, I want to know which market rates directly affect mortgages.

Also, and importantly, if fixed rate mortgages did go higher (along with market interest rates) how does this affect the bank of england base rate? Can you have a situation where the market interest rates go much higher (e.g. 6 or 7% like Italy) but still have 0.5% bank of england base rates? I mention this because of the massive implications for home owners struggling to meet their mortgage payments as well as paying for tax increases and much higher inflation. Should a homeowner who is paying say 2% above base rate (tracker) go on to a fixed rate of say 4% and be paying 1.5% more now in order to lock in a cheaper fixed mortgage? If the bank of england keeps base rates low for another year or two, could this be a foolish thing to do? What is your opinion (off the cuff)?

Lastly, if you do believe market rates AND bank of england base rates are going higher, then are we heading for an horrific housing market crash? If people are on the breadline already, any increases in interest rates will push them over. How do you see this playing out? Are the banks going to own the majority of houses and then rent them back to the people who will effectively become "serfs" to the banks?

Your careful attention to the above points and direct answers to them would be greatly appreciated.

Many thanks,


29 Nov 11, 02:08
Bond Yields

Although I'm in agreement with your view of the health of the UK finances I'm struggling to understand the mechanism behind how this will feed through into higher yields.

Japan has had huge debts for years but their yields have been a pretty steady 1.5% for the last decade - why is it different in our future? Won't QE artificially supress them during the period of inflation?

Ram Sharma
29 Nov 11, 03:01
Dividend Yeild Oriented REITs in Portfolio


What you think about trageting REIT funds to populate more dividend oriented ETF/Equity in portfolio. US regulation need REIT's to distribute their 90% profis to be distributed as dividends. These REITs (NLY, CIM, IVR) are consistently generating 15% or more dividend yeilds.

29 Nov 11, 03:52
Shorting Bonds, Inflation, Stocks, Fixed Mortgages



You can short bonds via your broker, futures market, Funds, ETF's and spread bookmakers,


I do an annual inflation forecast every year - Dec / Jan, so next one will be in a few weeks or so, but the big picture is of an decade long inflation mega-trend which I will take a peek at in my next article.


I want to get the fundementals out of the way first, before looking at the technical picture.


Lots of factors determine mortgage interest rates, but primarily determined by the interbank market and the government bond market, if credit is tight (as it is now) then the spread between the interbank market rates and government bonds will be wider.

The Bank of England base rate is irrelevant, it exists purely to funnel cash onto the balance sheet of the bankrupt banks i.e. they borrow short-term at low rates and lend longer term at higher rates (usually to the government).


I will update my analysis on the housing market depression, but my gut tells me that at worst house prices will fall 10% and more probably just stagnate and let inflation do its work, though it is very area dependant i.e. high public sector employment areas will see a crash whereas high private sector areas may see rising prices.


Yes QE supresses yields but only as long as the market allows governments to do so, Japan is different to the UK, it has a massive trade surplus (usually), UK has a massive trade deficit.

Dividend Yield Reits

Yes they are great investments, as long as they don't go bust.



29 Nov 11, 04:23

Dear Sir

Given the attached graph can you please explain why the bond vigilantes are after Spain when it has one of the lowest debt to GDP ratios in the EU? Your comments would be much appreciated.



29 Nov 11, 04:25

Because Spain cannot print money and inflate so is in a death spiral of ever rising debt to GDP towards default.

Whereas UK prints money so cannot default i.e. if debt interest is £50 billion then it will print £50 billion, if it is £100 billion then it will print £100 billion and so on.

Spain, cannot print euro's so the bond market knows in its current state it will default.



29 Nov 11, 12:19
The Wrong Solution To The Wrong Problem

Actually, the Euro has more problems in more catagories than a Burger King hamburger has layers of junk food. Some of the junk catagories are political, organizational, legal, economic, etc.. Naturally, all these problems interact, and many of them are, from a practical point of view, simply not soluable. I will select three problem areas at random just so I have something to talk about.

1. The EURO is a very stange mixture of differing countries with different wealth and debt levels, cultures, languages, customs, laws, forms of government, etc.. In other words, the EURO association is a diverse collection of countries seperated by a common geography.

2. Because of the above, the EURO treaty was designed to protect the sovereignty of its members. With only a few well defined exceptions, all 17 Euro nation members must approve of a law-like measure before it is enacted. This does a wonderful job of protecting sovereignty, but the resulting red tape and differing national opinions makes it very difficult to deal with time critical and very complex world-level economic problems.

3. The sum total national debt of the EURO nations is astronomical and can never be repaid.

I think the above explains the recent comical history of the US stock market. The "EURO leaders" come up with a Walayat/Bernanke-esque solution and the market soars, but when it becomes apparent the the solution cannot be imlemented, the market plunges.

Now the "NATO leaders" want to rewrite the treaty to limit the sovereignty of EURO member nations. Fat chance of passing that!

My solution? Split the EURO into two parts--the Northern called "EURO", and the southern called "PIIGS" (maybe someone could come up with better names). Then the North could have the their "the worlds best currency", and the South could happilly print their way out of debt.

Popcorn ready
29 Nov 11, 14:21
UK housing - avoid it like the plague


"you CAN relatively easily hedge against inflation in virtually any asset that CANNOT be printed , that's precious metals, commodities, land and housing (yes you have to do your research because land and housing are location dependant)"

The Land Registry figures yesterday show -0.9% on the months and -3.2% on the year. Not much of a hedge against 5% inflation. My worst investment is NS & I savings earning 3.9% which I am going to use to buy a house. Although that money is depreciating against food, fuel, etc that is entirely irrelevant. The only thing that can devalue it is HPI because it is only going to be spent on a house. After tax it has earned 3.12% against a -3.2% drop in house prices so I have gained 6.3% this year. Remember Land Regsitry is actual sales, the Nationwide is only for mortgage approvals which may not turn into purchases and Right Move is just asking prices.

UK politicians and media are currently spouting absolute garbage about the UK being a "safe haven" and our debt is cheaper than Germany. This is purely because we are printing money to buy our own debt. Currently at a rate of £18.75bn a month which is more than the Debt Management Office can issue!!

It is only a matter of time before the UK is exposed as the banana republic it really is and then interest will rise as you say. So how on earth can you be recommending housing as a hedge against inflation now? When interest rates shoot up as they must, look out below for house prices.

There is no rush at all to buy a house in the UK now as there is no prospect at all of prices rising dramatically. It is the time to wait and see, unles you can find a house you particularly want from a distressed seller.

The FTB mortgage indemnity scheme will only help builders to build more houses which increases later supply. It will not help people trying to sell existing stock - if anything it makes their chances even worse because there are no chains to start from the bottom by FTBs buying new stock.

The OBR forecasts today were very bearish on housing compared to their earlier estimates. House prices were lower in the coming years and an earlier forecast of a 20% rise in property transactions for 2013 is now down to 1%!!

You seem to have recently changed your opinion on UK housing as if you are trying to talk yourself into it. It is certainly not an inflation hedge at the moment. Is your spouse wanting to start nesting :0)

29 Nov 11, 16:27
UK housing

I will look at UK housing in a few weeks, but you need to factor in the whole picture.

for instance, if you own you don't pay potentially £2k per month to rent.

If you own, eventual capital gain is tax free, cash pays tax on interest ANNUALLY and shares are highly volatile.

At the end of the day, cash in the bank only sits on a spreadsheet, and its a never ending game of spreading it around just in case banks go bust, whereas owning property outright without debt is somethign you get to enjoy your wealth where the annual return is the yield you would have paid had you been renting.

Now if you buy property with borrowed money, then you are asking for trouble! But if your like me, then its not such a hard decison because the investment is for not 1 or 2 years but a decade or more, in which respect 5%, 10% or even 15% price volatility is nothing in terms of where the market price is likely to be in a decade or more.

And not to pre-empt my next housing analysis, remmeber at market bottoms, there are a million reasons why the market will continue to fall, it's only afterwards with the benefit of hindsight that it is obvious to everyone why a market bottomed.

At the end of the day all we have is a lease on life, so there is not much point in waiting until it is too late to enjoy the pile of fiat paper.



Peter M
29 Nov 11, 17:42
Bond market crash

Hi Nadeem,

Great article, as usual! Good to see an economics commentator who always interprets the behaviour of markets and governments with an eye on fiat currency manipulation. This seems to be the secret to a solid understanding of the eternal cycles in capitalist economies.

Anyway, to my question. You stated in the article that a large bond market crash is coming, where investors short the market and drive up yields. How do you think this will separately affect conventional gilts and index-linked gilts? If inflation goes ever higher, then index-linked gilts are the preferred investment. Therefore, will the crash in IL gilts be smaller than conventional gilts (which are better for deflation)? OR, will the ensuing rate rise from a bond market crash reduce inflation and make the crash in IL gilts worse???

I would be very interested in any insight you could provide on this.

All the best,


Art Pfeifer
29 Nov 11, 18:28

You wrote : The best solution for the debt crisis is for bankrupt countries to have a short-sharp shock to default on total debt, get the economic contraction out of the way,shrink the public sector and then out of the pain implement sound government spending policies which will ignite the next economic boom


Popcorn ready
29 Nov 11, 19:13
UK Housing

It's true I have rent to pay but the interest after tax on the amount I expect to spend on a house is £1,000's more than my rent this year. Not everyone will have a whole rent to pay - some may house share or live with parents.

You speak of the advantages of capital gains being tax free but isn't the gain even better if you buy at the lowest price possible? Again the yield (from no rent) is better if the price paid is lower.

As to buying with debt, in the past I would have agreed but now the game is different. I planned to pay in cash but now I'm not too sure. Even my worst performing investment at NS&I 3.9% means a tracker at base rate + 1.89% leaves a profit. If rates went up I could just pay a mortgage off. Say someone has NS&I Index Linkers what would be the point of selling them to pay in cash? They would currently be throwing away around a 3% arb! They would be being paid to buy the house with debt. This is one of the reasons holding house prices up - but it can only last while mortgages are so cheap.

If you read he would INSIST you bought with debt.

All this about enjoy your money while you can buy a house is fine. Though it's sentiment based not what I expect on an investment site. If I rushed in now and bought an over priced house compared to a nicer house at a cheaper price later - I would not enjoy it!

29 Nov 11, 21:30
house buying and wealth

Firstly there is a credit crunch, you can't get cheap mortgages.

Secondaly, the NS&I index linked bonds have been withdrawn and were limitd to £15k per issue.

Thirdly, rental gives you an equivalent yield on the property your buying i.e for £2k per month for a 5% yield would translate into a target purchase price of £480k, which you can call on if you choose / need to.

4. Debt is enslavement, those that propose taking on debt are gambling with their futures and risk over leveraging themselves into bankrupty thus losing it all, you need to look at earning interest rather than paying interest and in todays environment interest being paid is a pittance unless u risk capital.

5. The point of wealth.

There has to be a point to accumulating wealth, i.e. objectives, milestones:

a. Interest and return to cover every day living expenditures, thus all income / revenues are surplus.

b. Buy long-term appreciating assets that can be enjoyed, property u live in fits this bill. Yes for investing you can time purchases because your criteria is wider.

c. Buy depreciating assets that increase productivity i.e. I am sure you have an expensive smartphone that will lose approx half its value over 12months, or your pc approx 1/3rd its value, or car approx 1/3rd its value,

d. .....

We've had a 1 year house price crash (something that I called at the very peak in August 2007) followed by a 2.5 year depression, how much more downside ? I will take a look at in my next article, though my gut is telling me that a year from now house prices will be higher as the market has had plenty of time to fall.

Whilst in November 2011 I lack the benefit of hindsight, I can imagine what reasons will be given in November 2012, such as depositors having taken their money out of risky banks that pay little interest well below inflation and dumping it in properties.

Plus high immigration / low migration putting upward pressure on UK housing demand

Plus - The Government giving tax payers rebates (bribes) in advance of the 2015 General Election thus sending inflation surely higher still.

Yes, there will be plenty of reasons why, all clear in hindsight.



29 Nov 11, 21:38
Banking Sectors


The banks SHOULD have gone bankrupt (as I wrote in Sept2008), that way the pain would have been short and sharp instead the corrupt politicians have dumped all of the losses and liabilities onto tax payers.

29 Nov 11, 21:42
Bond market crash

Hi Peter

There is going to be a great deal of volatility not only in bond markets but also inflation indices, its just not possible to see how they will react at particular point sin time just that the long-run should obviously see index linked bonds rise, remember bonds mature so the bond price volatiltiy will be dependant on time left to maturity.

Apart from speculative shorts, mostly I am just going to wait to pick up bonds index linked or conventional if they plunge in price i.e. If I can get a yield of 7% (like Italy) then that will do me just fine for 10 years. Ive used this strategy many times lock in great relatively risk free and low time management returns.



Popcorn ready
30 Nov 11, 04:51
UK housing


You didn't really listen to what I was saying.

I was talking about buying with cash or taking out a mortgage even though you had enough cash to pay in full - not a debt slave with mortgage payments.

For example HSBC do a tracker base rate + 1.89% so 2.39% for people with a decent deposit. Even on my NS&I 3.9% which is 3.12% after tax that represents a free arb 3.12% - 2.39% of 0.73%. It is NOT worth cashing in the NS&I to buy in cash.

Re NS&I Index Linkers I said what would be the point of cashing them in - NOT - that you could buy them now. If people have stuck money away in them for a few years they are getting 5%+ now while the mortgage is 2.39%, it is literally free money to buy with debt. If RPI drops and the mortgage rates increase that is when you cash them in.

Amerman's arguments have a US slant in that the mortgage rate is fixed for the duration. His argument is basically if you pay in cash today, it is with a dollar that is worth a dollar today. However in 25 years it will buy much less than a dollar. So you may as well pay some of the dollars as years progress because they are not worth as much. Read his stuff from my link. See what you think.

I think if you look at things from a 'what is the point of welath' then you must think you have enough! Well done. You say we had a 1 year house price crash, so you must think the UK has cured it's problems. I think we have had a 40 year credit bubble and they are making desperate attempts to keep it going. House prices could go up but not in the way they did before because the credit isn't there and partly due to personal circumstances I am waiting to see what happens. I don't buy this UK is a safe haven because our debt is cheaper than Germany - it's only because we are printing to buy it ourselves and drive the yields down. Another 7 years of deficit reduction is now planned - that's 7 years the total debt is rising. Are the markets really so blind?

30 Nov 11, 10:31
Uk housing market


A tracker is high risk, fixed is infinetely better. As you say in US you can fix for 25 years then that is an option.

As for wealth, your basing on current trend and state of the market in terms of projected austerity, the reality is markets AND economies are SENTIMENT driven, it does not take many years for a bust to turn into a boom, again I am pre-empting my next 2 articles.



Popcorn ready
30 Nov 11, 13:50
UK housing

Of course a tracker is high risk but I was talking about someone with the cash to pay the mortgage off. If rates rise and the tracker is going to shoot up you pay the mortgage off.

If you have cash it can be better not to spend it and to be in debt. If your interest/investment income minus tax is more than the mortgage rate.

30 Nov 11, 17:08
Central banks coordination

Hi Nadeem,

Your long standing conclusion is that Germany will leave the Eurozone and the Eurozone will print trillions to prevent a banking system collapse, both of these outcomes will feed the Inflation mega-trend.

Could you comment on the below article that argues that the Germans bond auction failure was an orchestrated event to punish Germany and to warn the German government not to obstruct “unity” or loss of individual country sovereignty to give the ECB the power to be able to undertake “quantitative easing” on its own?

Could also give your opinion on the Central Banks Coordination put forward today and how it support your point of Germany leaving the Euro?

Best regards,


30 Nov 11, 18:07
German Bunds No Consipracy / Cash is crap


Roberts article ignores the facts of what happened, as I mention near the start of my article so is errorenous.

Germany will ultimately leave the euro, though it may take years because they don't want to leave given exchange rate advantages. They will leave because the southern states will never balance budgets, thus need much weaker / higher inflation currencies which Germany cannot stomach.

Todays CB actions are banking system liquidity related.

Popcorn - I would have doubled my risk, i.e. have cash at risk in the banks and the risk plus the risk of tracker mortgages going ballastic, when the whole point was to reduce risk by moving cash from the banks into a property. When investing, one of the things to consider is how much time one is goign spend on managing the investments, and the current risk environment is resulting in cash demanding a lot of time in trying to limit risk of loss.

Again if the risk for holding cash was zero then there would be no problem, but I have had to put up with this nonsense for years that the risk for cash is NOT ZERO, infact the risk has steadily increased, Ive had enough, the rates being paid are crap and virtuakky all of my high fixes done at 7%+ during 2008 have now matured, I just need very low risk to counterbalance my high risk stocks and commodities.

whereas Today managing cash takes more time then managing my stocks and commodities when it should not be so! So I know I am doing the right thing in terms of the overall portfolio by counter balancing risks, so a good 60% of my cash will be gone within the next 6 weeks, in fact I am actually leaning towards buying a second property during 2012.

The worst thing you can do during a debt crisis is to put yourself in debt, you WILL regret it.



30 Nov 11, 22:53
Second property in 2012

Hi Nadeem,

When you say that you lean towards buy a second property I must assume that you are buying it 100% in cash…or otherwise how would you manage the term of your mortgage recognizing the future higher mortgage rates?



30 Nov 11, 23:29
Total Debt (Public+Private) % GDP

Hi Nadeem,

When I look at you table of Country Total Debt (Public+Private)

I am curious to understand the difference between your number and what is given by the CIA The World Factbook, the IMF and Eurostat as shown on the link below:

So if I get it the difference in the US between 300% in your table versus the 94% given by the IMF is all private? Or are you including state debt issued by individual US states and intra-government debt (with amounts owed to the Medicare and Social Security funds being the largest portion of "intra-government" debt)? I am not sure. Could you please expand futher on the subject?

Thank very much,


30 Nov 11, 23:49
Total Debt


It's total debt, thats public+corporate+personal.

I actually estimate UK total debt and liabilities at 680% of GDP, but I am going by official data in the above examples.

CIA just looks at official public debt or PSND, which is about 76% for the UK.

2nd Prop - Yes cash, sell bonds to buy property, cos bonds not worth buying at 2.20%, probability favours property far outstripping bond return over next 10 years.



02 Dec 11, 15:02


Can you explain to me why the UK can print money but Spain cannot. Money is not tied to the Gold standard or any other intrinsic value so why can't Spain just print money?

02 Dec 11, 23:31
Spain Euro

Becuase their money is the EURO which ONLY the ECB can print NOT the Spanish central bank and the Germans hate to print money because they learned the lesson from history that printing money eventually kills the curreny and destroys the economy.

The Euro is NOT spains currency they have NO POWERRS to print it, just as they have no powers to print dollars or sterling.

Therefore the Spanish central bank is crippled, it cannot do what other central banks can do which is to print currency to buy its own debt.

They gave up the Euro because Spain and the other PIIGS were incompetant in managing their economies, that would always result in high inflation and high interest rates as they printed too much money so the currency would fall,

The Euro meant they had a strong currency and had ultra low interest rates, which they greatly abused resulting in high intrest rates for their bonds, but these high interest rates reflect the real risk of default because there inflation is far lower than it should so the risk of loss of value has been transfered to the bond market.

There is no free lunch, they do not deserve low interest rates because their economies are very badly managed.

Offcourse the bailing out the bankster elite did not help, but they did what their masters in Brussells told them to do.

Really Spain and the other PIIGS need to get to gether and make a PIIGS Euro, where they can print as much currency as they want to.

Popcorn Ready
06 Dec 11, 04:25
UK Housing


I don't see rising mortgage rates as a problem if you have the cash to pay the mortgage off. You are unaffected by the rise.

06 Dec 11, 08:52

Hi Popcorn

The discussions gettign a bit circular, the point is that cash is not zero risk, so taking a mortgage on rachets the risk higher instead of reducing risk.

Mach M
11 Dec 11, 05:17
USA Income $0 for Next 4 Years

Hello Nadeem,

USA is $15 Trillion every year economy and USA debts is $60 Trillion.

This means $0 income for USA for next 4 years. Correct me if I am wrong?

Read this:

"The Government is lying about the amount of debt. It is engaging in Enron accounting," said Laurence Kotlikoff, an economist at Boston University and co-author of The Coming Generational Storm: What You Need to Know about America's Economic Future.

Mr Kotlikoff says the debt is actually $200 Trillion.

Mr Moylan says the number is likely about $60 Trillion.

THE actual figure of the US' national debt is much higher than the official sum of $US13.4 trillion ($14.3 trillion) given by the Congressional Budget Office, according to analysts cited on Sunday by the New York Post.


Majority of giant companies worldwide have big debts or massive debts.

Unless all the debts are paid off, these companies cannot say "we are profitable company".



11 Dec 11, 05:33
US Debt


Yes, US debt and liabilities are probably $200 trillion, or about 1300% of GDP, what this means is that there is going to be a lot of inflation. Todays $200 trillion will be worth $2 trillion by the time they are done!



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