Why is Alexander The Great's Greece "not allowed to Default"

           Before Entering to topic of why "not allowed to default" let's touch base on why it is defaulting. In one sentence answer is "There is no Alexander the great left in Greece". Countries who have trade / budget deficit, have been going bankrupt for a while. India went bankrupt in 1991. Indian Rupee was devaluated.Russia went bankrupt in 1998. This is no new thing. Over the time great nations adjust themselves and again thrive form it.
           Now is "Greece too big to fail"? Looking into numbers, GDP of Greece $318.1 billion (2010 est.) is smaller than revenue of Exxon Mobil  US$ 383.221 billion (2010) That does not mean it's small number but if you look at world GDP 74.54 Trillion it's hardly 0.4 % of it so it does not sound like too big to fail. Then why there is so much hue and cry on Greece. I think there are multiple reasons behind this complex issue. 


# First of all Greece is not issuing it's own currency ECB (European Central bank) issues it. Hence the standard solution of de-valuating currency and get rid of debt won't work. (One that India and Russia Used during their balance of payment issue)
# Secondly Greece is just tip of an iceberg. What happens with Greece may happen with all (PIIGS) Portugal, Ireland, Italy, Spain and even Finland. If they all default, the viability of Euro as Single currency will almost come to an end.
# Therefore Germany the main force behind Euro is not allowing any sudden default / uncontrolled action from anyone.

European Debt Crisis

On the top of all this the very less discussed but very very crucial reason behind "not allowing" must be CDS (Credit Default Swap). This is how CDS work..


1) Let's say Deutsche Bank  buy  10 Yr bonds form Greece government or any corporate. In order to "mitigate Risk of  bond default" they also buy CDS (kind of Insurance) form other bank. Say JPMC; based on risk involved in Bond JPMC charges "CDS fee" to Deutsche Bank.
2) If Greece pay back as agreed; JPMC gets fees and Deutsche Bank get principal and interest form Greece Government.
3) If Greece can not pay. Deutsche bank claim all their losses to JPMC and JPMC has to pay to Deutsche Bank. 


Now understanding credit default swaps, let's imagine on one fine day PIIGS and Finland default. Immediately creditors like Deutsche Bank / BNP Paribas will run to their CDS issuers (Who knows who they are but surely they are form Financial Big Bank community). We all know how healthy our banks are. Hence we will surely end up in situation where PIIGS country and "CDS issuer" both default. This Situation is called as "Double Default".


So summing up we are in situation where if We put governments as one community and Big Banks as other community. Big Banks are both Creditor and Insurance Provider to Governments. In this game with 1 default of country One bank will fail as CDS issuer and other as creditor (All 3 party lose). Remember in 2008 we learned that "Big Banks can not be allowed to fail" and that's exactly reason why "Greece is not allowed to fail" 


How long this "Not allowed" will be tolerated by Germany and other solvent nations is a million dollar question whose answer is tough. Irony of story again is money that government has is of common man's tax money and money that bank has is common man's saving. so in both cases common man is to lose either way. 


Comments / thoughts welcome.. 


P.S. : Ref : http://www2.isda.org/ 
" The market size for Credit Default Swaps more than doubled in size each year from $3.7 trillion in 2003. By the end of 2007, the CDS market had a notional value of $62.2 trillion. But notional amount fell during 2008 as a result of dealer "portfolio compression" efforts (replacing offsetting redundant contracts), and by the end of 2008 notional amount outstanding had fallen 38 percent to $38.6 trillion" 

Impact of Paper Currency on Equity Market, Income Inequality, Marriage rate, Divorce rate, Health....

By now I believe regular readers of our blog know that we have a Big time problem with "Paper currency system" that started on 15th Aug 1971.(Recently, writing in the Financial Times, World Bank President Robert Zoellick called for a new monetary system to replace the floating rates adopted in 1971 known as Bretton Woods II.). So there is a thought process coming in mainstream that agree on flaws of paper currency.  


In this article I have tried to see "Before 70s" vs " After 70s" pattern for many aspects. Although I don't like to use maths and stats in sensitive issues such as Marriage rate, Divorce Rate or even on Health, few graphs below were too shocking for me. So I just thought of sharing with our friends.

Historic Dow Jones Before and after Paper currency

As we all know Dow Jones Industrial Index is one of the TOP Indicator of equity health of US and in turn whole world, We can clearly see "Before 70s" vs " After 70s" pattern here.

widening income Inequality 

This is pretty interesting one. (Income inequality has Increased in Paper currencies ). There is "Before 70s" vs " After 70s" pattern here. What might be reason ? Is that the previous Graph ? are people investing in Stocks (By understanding / not understanding magic of paper currencies) becoming richer? Leaving rest all poor in comparison?  Is equity Investment only best way to make money in paper currencies?

Median Annual Earnings over decades.

Here there is co-relation for Men's income. It remains in same bracket while women's income growing steadily. This should make us proud as a human race that women's are bridging the gap of income. Although  for Woman's graph increasing trend is from mid 50s and has gone up steadily so there seems no pre 70 and post 70s correlation.

Divorce Rate over decades.

This was a simply shock to me. Here I see correlation to Before 70s and After 70s . What has changed? There was a discussion within friends on this. One said "Now a days males are having more bad habits like Smoking, over Drinking, etc... That is causing all this" Another friend who suggested that "May be women's have better income now (Previous Graph) which "helps" them to take a call if they are not happy in their married life. In old days even if women was not happy she had no option but to stick with husband as she had no economic freedom so in fact it's good development due to economy". Another more conservative friend had strong argument on that comment. He said, "Look no one divorce for pleasure. But if what you are saying is correct, then after 1st divorce, their life should be better off. In reality study shows that in US, Divorce rate for 1st Marriage is 50%, for 2nd Marriage it's 68% while for 3rd marriage it's 78%. Which means that something is wrong in thinking that capacity to take divorce is "helping" factor for happy life!!!."

I had no counter argument on that ... But what worries me is are we going in right direction as a society.

Decreasing Marriage Rate.

I see a correlation here Well. There is impact on Marriage rare as well. What may be the reason ? Need to think more ... ?

Health Data from official Web Site

What to say here .. Is easy money and credit bubble making us fat also ? at least graph shows it.

Now to counter all these arguments someone may say that these social issues have nothing to do with paper currency etc..Don't blame all our problems in paper currency...  it's a new era and this is bound to happen..... To me it makes a lot of sense in believing that all this has some co-relation with each other and is connected. But I think this is a topic of debate and I welcome comments and arguments here.

P.S:  To add the data I have taken is of 50 Years + ( Thanks to Prof Reeve Vanneman at University of Maryland for her great work on .. http://www.bsos.umd.edu/socy/vanneman/socy441/trends/divorce.html ).

Stimulating Credibility.

It is said that with money and power one can get everything in life but not credibility. What has happened with economy is exactly same today. With stimulus markets are up but not confidence. People are still concerned a lot about economy, inflation etc.. Nobody is actually able to visualize something like complete collapse but people are still nervous about it. In last 2 weeks there has been more discussion about Double Dip recession that is natural trend of market.

            Another observation that I had in recent week was difference in strategy. While countries like Germany and UK are behind budget cuts, in US, India, stimulus is still considered as preferred way to fight with recession.

            In either ways, gold touching it’s all time high, and overall nervousness in economy; governments are desperately trying to give confidence to system. In general it might mean a time for another stimulus in US or say direct injections in economy or efforts to reduce deficit in some other countries. All they are doing now is to stimulate credibility.

A Complete U turn?

A Complete U turn?

A News

The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, also dropped proposals for a global banking levy, instead giving countries leeway to do what they thought best for their domestic circumstances.

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.

Source : http://www.survivalnewsnetwork.com/global-economy-–-g20-drops-support-for-fiscal-stimulus/

WOW I can’t believe this. Are they serious? Will they take this bitter but essential pill?

If YES  - > Deflation -> Interest Rates UPà Double dip recession -> Economy survive as currency gains value.

If they act what they say, world enters in deflationary ear in time to come. “Gold will go down so will silver”. Real estate market will simply collapse. Interest Rates will go up so will value of Money. No matter how bitter this step sounds, this can save world from “Complete Collapse of Global Economy down the line if they really do what they say”.

It obviously means accepting clear double dip recession that will allow mal investments to purge. This can also cause depression. But in my opinion both these scenarios will be better than “Zimbabwe style collapse of economic system”.

If NO -> Inflation -> Interest Rate Low-> Hyperinflation -> Currency Crisisà Economy Collapse.

If they don’t act what they say, obviously we will have inflationary era and sky will be limit for gold, silver and in fact all commodities. What we need to be afraid is for the time being they will unwind the stimulus and as effect if S&P falls below 800 and Dow say below 7000. They will again have a meeting to support stimulus. All this will mean only Inflation in step manner as opposed to ramp manner.

Even if Yes / No

In both these situation war is one of the big time possibility as both these environments create frustrations for common man and to divert attention then typically politicians declare war.

Let’s hope I am stupid person and none of these 3 scenarios happen.

PIIGS in line to collapse

Posted on : Feb, 20, 2010

Dear All,

This has been a week with events. G out of PIIGS cried this week. The term PIIGS stands for European Nations with Debt Crisis (Portugal, Ireland, Italy, Greece, Spain). So far it's easy for us to read the stories of this and even their Nationals are ok as there are Big Countries that can Bail out. Just Imagine who will be there to bail out if Big Nations go in debt crisis, which as we know is inevitable. Of course root causes are our false assumptions about Economy like.

1) More GDP better Growth.

2) More consumer confidence more Growth.

Anyways I will explain national Debt issue due to "Rolling up Debt" and more on terms above in coming updates as have really less bandwidth this week. However for those who can spend some time the Video below is really interesting one.

http://video.google.com/videoplay?docid=3915119166991168859#