History Of Nations Going Bankrupt

Ever since the obvious default of the Desert Arab Las Vegas Dubai debts, the gnome universe is very insecure.  They hear the good news that all is well and all markets are going up but they are also aware that this is very fragile since the Derivatives Beast still lives and breathes.  As well as the problem of too much government debt on too many nations, in particular, the mighty US empire.  Which just decided to jump into the Afghani caldron with both feet, if not headfirst.  


My cartoon from August 4, 2008:  Money Matters: Why Stocks And Commodities Are All Falling Down

I wrote a number of prescient articles in the past, not that anyone believes anything I say.  This old one from 8/8/8 is a great example.  I hope everyone clicks on it and reads it in full.


Today, bond markets are roiling due to some various fears about the future of US debt payments.  The question is, will the export giants in Asia begin dumping US debts into the deep blue Pacific Ocean?  Of course, I can understand these fears:


The Associated Press: Treasury prices drop on oversupply concerns

The government is scheduled to sell three-year notes, 10-year notes and 30-year bonds next week. Capital raising plans by Bank of America Corp. and rumors Japan might sell as much as $100 billion of its U.S. Treasurys holdings helped fuel Thursday’s sell-off.

. Tom di Galoma, head of U.S. rates trading at Guggenheim Partners, said the Japan talk is “pure speculation at this point.” However, he said the market is prone to trade on rumors when there is little hard news to move it.


This is pure rumor. Frankly, I give it little shrift since Japan is just barely emerging from the global depression which hammered Toyota very hard.  The Nikkei rose today based on Japanese anticipation of having the yen die a little bit against the dollar.  Anything is better than yen running at 84-89 to the dollar. They want 120 to the dollar!  Paradise for exporters!  So, pass this by me again: why on earth would the central bankers of Japan, Inc, sell US 30 year bonds?  This would weaken the dollar due to everyone freaking out that the US will go bankrupt.


Think of Japan as the merchant in Emma Bovary Can’t Get Any More Loans. Emma, the wife of the inept village doctor, went into hock with this merchant.  He kept giving her credit and when her spending was greater than the value of her family’s property holdings, he foreclosed on her.


Now, the US has plenty of property to hand over to Japan and China. Neither nation is in any mood to collect right now because collection is difficult, at best.  On top of this, Japan doesn’t want the US to suddenly collapse and leave dear old Imperial Japan helpless right next to the irritable Dragon of China which as a long, long memory.


So this is one rumor I won’t endorse, not at all.  Of course, there is the other obvious matter: Japan can’t sell US 30 year bonds for much of anything, anyway.  First, the due date on these beauties is long after the Chinese 50 Year Plan which was launched 25 years ago.  So they won’t buy it.  10 year bonds are OK, though.


Of course, there are lots of people peddling lots of fearful stuff.  But they seem addicted to peddling ridiculous fears (not, say, the possibility of the religious wars triggering the Apocalypse!) along the lines of various smaller, often vanishingly small matters.  Frankly, it would be good to spook the bond markets.  They expect easy profits to fall into their laps all the time.


Credit Swaps Industry to Meet on Japan Corporate Debt Talks – Bloomberg.com

Credit-default swaps traders in Tokyo will meet next week to discuss whether private corporate debt restructuring talks, which roiled contracts protecting against a default by Aiful Corp., should trigger payouts to swaps buyers.


The International Swaps and Derivatives Association said Dec. 2 that the group is assessing whether Japan’s alternative dispute resolution process for companies restructuring their debt triggers a so-called credit event that would lead to payouts. ISDA will hold a forum for members and counsel next week to “discuss views” on the matter, ISDA General Counsel David Geen said yesterday in a telephone interview.


Move over, Emma B!  HAHAHA.  The Derivatives Beast is attacking and eating more victims!  And of course, settling these stupid deals baffles everyone since no one can do this.  IT IS IMPOSSIBLE.  So they have to cook up some fake system that looks as if it is working but all it is, a back door to some nation’s treasury which is then looted.  So if $100 billion US bonds change hands, it will be due to THIS stupid, useless, dumb dealing business.


On the other hand, nations as well as entire empires can go bankrupt. And below is an interesting study about all this which has neat charts and graphs:  This Time is Different by Carmen Reinhart, Uof M, NBER and Kenneth S. Rogoff, Harvard, NBER

As we look at this neat graph which runs from the Napoleonic Wars to today, we see several major internationalbankruptcy waves, all of these are GOVERNMENT debt waves.  Hmmmm….the first one is the wars of Napoleon.  It led to a massive global depression when the old megalomanic was shipped off to his tiny British island exile.  But slowly, things rebuilt so credit began to flow after 1820 and it didn’t take very long for many nations to run up large sovereign debts leading to a vast wave of national bankruptcies starting in mid-1830.


Here is a very famous painting of one of several major uprisings during that year.  Many high government debt cycles are followed by very vicious wars and revolutions because things get very nasty when there is little credit expansion available to roll over debts.  One massive collapse from this time is the fall of China.  Spain went bankrupt and Mexico was invaded by the US.


The next great wave of defaults are connected to wars such as the German invasion of France, for example, and the default of the American Confederacy.    By 1890, credit began to flow again and bankruptcies abated somewhat.  Then, the WWI bankruptcy surge slammed into Europe like a freight train.


After the US won WWII, being a huge industrial creditor nation with a nice trade surplus, we backed the growth of global credit.  The fall of communism and the Japanese discovery of the ZIRP/FOREX system created a new credit surge which ran right alongside a surge in defaults which is all very odd and probably due to weak energy commodity prices during this time frame.  Here are some more graphs:

The catastrophe of WWI-WWII shows up clearly in this graph.  In particular, China’s collapse was a mega-event.  China was one of the oldest empires on earth and its crash was a very massive tsunami running over many systems.  The other great powers looted China but this didn’t save any of them from also going bankrupt as these hyenas squabbled with each other over who would rule the earth and then they fought massive, epic, hideous battles where they battered each other literally to the edge of near-death.


The only nation to survive this meat grinder in tact was good old ‘protectionist’ USA.  The wealth destruction of the WWI-WWII period was just breathtaking.  When they talk about wealth destruction in this credit bubble pop this last year, that was all minor paper wealth that mostly was phantom money in the first place (the Derivatives Beast) rather than real wealth (whole cities and industries).  The industrial losses in the US and UK were more than offset by industrial growth in Asia, for example.


These physical facilities still exist in the real world!  So do the cities and the humans.  WWI and especially, WWII, killed many, many, many millions of people.  Not just the dead from the fighting and bombings but many from starvation.  For example, millions of Indians starved to death during WWII.  Not to mention again, the Chinese.  The main wealth destruction was the annihilation of entire cities.  Hiroshima, Nagasaki and Dresden, for example, not to mention, Stalingrad, are outstanding examples of near-total annihilation of major cities.


The period between WWI and WWII was not pleasant in most of the world, unlike the US.  Japan invaded the rest of Korea and then, Manchuria and instituted very brutal rule and enslavement of the people there.  Then, there were all the colonial wars of suppression by England and France as both rent the remains of the Ottoman Empire to shreds.  The Muslims in the Middle East have not forgotten that business, either.  It festers alongside Chinese sores.


Back to ‘This Time Is Different’:

OK: China recognizes this which is why the communists prevented floods of capital inflows.  Back in the summer of 2007, Japan mocked China and warned that they could flood China with capital JUST LIKE THEY DID TO THE US….and China snorted that unlike the US, they would not allow this.  And so it was: the capital created by Japan didn’t flood China.  It moved to the US where the US had one last great surge of corporate mergers and game playing from August 2007-August 2008.  This emphatically included floods of credit capital that flooded oil markets sending the price of oil to nearly $150 a barrel.


Naturally, the flood of Japanese carry trade funny money created an epic banking collapse which will lead to a government default of some sort.  By all rights, the US should default due to no sane person wanting to hold US debts…except everyone wants to hold in this game since the US is still the world’s #1 consumer nation and China isn’t done industrializing itself.

Now, about real money, that is gold, silver and copper.  Gold has set records recently.  People are very nervous about paper wealth so they are holding onto ‘real’ wealth.  That is, something physical.  Of course, this is not entirely true.  People are buying paper based on supposed (note the word here!) gold holdings.  I fear, there may be some sad faces when people discover the gold holders doubled the paper and handed out pretty certificates to more than one person promising them the same gold coins being held in secret vaults.  This is the way of the world: if you can swindle someone, do it.  Ie: Buyer beware.


CORRECTION:  Paulson May Have Made $45.3 Million on Detour Gold (Update1) – Bloomberg.com: The big dealers are making money on gold, not buy up or buy out deals.

One of the sad and odd things about this graph showing how the silver content in coins (remember when silver coins in the US were pure silver???) degraded over time from the Middle Ages (1400) to the Napoleonic Wars: the discovery of the vast gold and silver hoards and mines of the entire New World was in 1500-1700.  Now, why on earth would Medieval coins that were big and pure, suddenly begin to degrade exactly at this same time frame???


And this is the real lesson!  The cause of this degradation was WAR.  Europe suddenly discovered how to mount multiple big cannons on ships.  Using this new firing platform, they poured across the Seven Seas, destroying everyone else’s economies and looting everything in sight.  Then, they turned on each other on the bounty main and hacked away at each other, then the 30 years war tore apart all of Middle Europe and destroyed Germany and Bohemia.  And the Lowlands rebellion against Spain led to the Spanish attacks on England, etc, etc.


That is, this was a classic mega-European long war which devastated vast lands.  For example, parts of Bohemia and Germany lost up to 75% of their populations!  During this time, the vast majority of natives of the New World died of disease and environmental destruction (overhunting to supply European tastes for beaver, etc).  Africa was denuded of millions of farmers who were enslaved and shipped mostly to the New World.


All this this cost a lot.  A terrible amount, so despite a flood of easy ‘money’ in the form of gold and silver, Spain and Portugal both ran deep in the red and had repeated defaults beginning with 1600.  And ditto, France, beginning in 1700.  Colonialist wars of exploitation=interfraternal wars in Europe.


Now, back to the US: here is a graph from the Federal Reserve which shows how US housing debt grew since WWII:

I took the last decade and made an orange pyramid of it and then moved the shadow of this forwards to 1990.  Note the different growth rates!  It was much more than double the 1990 rate of growth and that rate was faster than any previous growth in US borrowing for real estate loans.  This is a classic mega-bubble.  US real estate loans didn’t break $10 billion before 1970.  It reached a trillion in 1993.  And it was 4 trillion a mere 16 years later.  It took 23 years to grow from $10 billion to a trillion and much less to shoot upwards to $4 trillion.  This is just absurd.  And on top of this, the greatest growth was during the ‘low inflation’ years!


Which leads me to say, cheap lending leads to asset bubbles which are due to too much cheap credit and this always ends with the bubble popping and then destroying not only economies but nations.

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Filed under .money matters, Free Trade

13 responses to “History Of Nations Going Bankrupt

  1. Eric

    FYI – the Paulson who bought big into gold is a well-known hedge fund manager – not the former Treasury Secretary. I hope he doesn’t end up like Cinna the poet.


    ELAINE: Thanks, I corrected it.

  2. Katya

    Japan’s bigwig is up on Reuters saying no plan to sell U.S. Treasuries.


  3. emsnews

    Katya, as I expected, the rumors are not true.

  4. nah

    Government creates money…. and they like to think of themselves as moderators
    honor the children

  5. nah

    Big Freeze: Earth Could Plunge into Sudden Ice Age
    im a global warming BELIEVER… not cuz co2 but because the historical record shows beasts and seasons that are inherently warm followed by epocs of cooling….
    that does not mean that it could get cooler… but that the extengint circumstance of this planet is longer periods of tropical temperatures
    there have been ice ages… and we could be falling back into the same epoch…
    but earthly warming is the ‘high energy’ normal of our environment from a historical record…. and we will be going back…. until volitility leans tword cooling… which it does not even make a push at this point…. warm is normal… cooling is closer to the last MAJOR re-framing of global climate
    so we live in a cooling that has reached 50-70% of normal tropic mean…. we will either get to normal… 100%… or enter another volatile epoch…
    warming is normal from here… cooling… is but a season… suns like ours get larger and regionally warmer….
    we will not die all so cold

  6. if

    What is Good for Goldman Sachs is Good for America

  7. CK

    I am so old that I remember when Engine Charlie Wilson said in answer to a question posed at his confirmation hearing: ” … because for many years I have believed that what’s good for the country is good for the General Motors and vice versa.”
    How strange to think that that was said when GM was still the most puissant manufacturing company in the world.

  8. DoesItMatter

    British are allegedly held responsible for creating the famine in India – in the early part of the 20th century.

  9. nah

    Tiger is a Cheetah…. thats hillarious…. get it… tiger wood slept around and is famous maried with children style…. so hes got to be fast and nimble like a cheetah

  10. Gary


    I once saw a famous painting of a world suspended in space and that world was shaped like a globe. Everybody was inside this globe performing their tasks going about their daily routines unaware there was a huge rip or tear in the skin of the globe.

    Outside the globe was a swarm of winged beings frantically trying to repair the tear.

    I wish I saved a picture of this old painting.

    Do you know who it was that painted this ?

    I dont think it was the Dutch guy, Bosch.

  11. danL

    relax. I’ve lived with with Arabs for long time and I’ve not seen more disorganized and destructive bunch. For them it’s but a small step to suiciadal ventures – there’s literally nothing they do better.

    So do I weep for their hard life? Do you weep for the people from Africa that your agressive ancestors enslaved?

    It’s quite hillarious how Americans perceive themselves…

  12. Paul S

    British are allegedly held responsible for creating the famine in India.” Don’t forget about the Opium they forced upon the Chinese in the mid-1800’s and on.

  13. since now the world is facing to financial crisis, we can see lots of companies going bankrupt. therefore we need to stay updated on these types of situations in order to get the best from our financial deals accordingly.

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