Selling More CDS on Europe Debt Raises Risk for U.S. Banks – Businessweek


The US must be delighted that the rumbling crisis in Europe is deflecting (or merely delaying) calls for closer scrutiny of their own financial "smokescreen".

We are at the stage where I really doubt it matters which gerry-built financial structure collapses first! Conditions are such that these fragile structures will fall one after the other and those, whose personal and collective greed led them to steer a course intended to preserve accumulated power and wealth, will come to realise the futility of the exercise when they lose both…and more.

“Risk isn’t going to evaporate through these trades,” Cannon said.

“The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who’s ultimately going to pay for the losses?”

via Selling More CDS on Europe Debt Raises Risk for U.S. Banks – Businessweek.

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Why (and how) the U.S. Has Launched a New Financial World War


BEIJING - OCTOBER 29:  Chinese and American na...

Image by Getty Images via @daylife

Any, reasonably well informed and right-minded person must have been wondering just what the hell has been going on with the money being pumped into the financial system and continuing to “disappear”!?

The article, from which this extract is taken can be found here. It MAY answer some pretty obvious questions…and pose plenty of new ones!

Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets.

Victory promises to go to whatever economy’s banking system can create the most credit, using an army of computer keyboards to appropriate the world’s resources. The key is to persuade foreign central banks to accept this electronic credit.

 

The Author: Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire(new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

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Taleb: Government Deficits Could Be the Next ‘Black Swan’


When is a Black swan not a Black swan???

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NNT tends to be worth listening to even if this conclusion wont surprise too many!

Interestingly our own, unique, Ontonix analysis measures the fragility of the structure of the individual economies of EU member states as well as of the “EU system”. The updated report for Q4 2009 is available for FREE DOWNLOAD on our website. Q1 2010 EU Structural Fragility Report. NOW AVAILABLE for €199.

I was, somewhat, startled when, at a recent meeting, one of the most “in demand” Global financial risk experts, in a very matter of fact manner, said that we are only months away from the first sovereign defaults within the Eurozone. Not one of the more obvious contenders. Perhaps less surprising, is that some US states will also default.

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Taleb has published a new version of his 2007 best seller The Black Swan. The second edition includes a new 73-page essay, “On Robustness and Fragility.” Businessweek.com interviewed Taleb in early July about his views on investing and the dangerous Black Swans—i.e. unpredictable events with big consequences—that could lie in wait for financial markets.

What are are potential sources of fragility or danger that you’re keeping an eye on?

The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanoes, you can land two or three weeks late. How often have you landed two hours early? Never. It’s the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things cost more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.

The problem is getting runaway. It’s becoming a pure Ponzi scheme. It’s very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.

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Please visit Econtalk to listen to the podcast &/or read some of the text and comments: Taleb on Black Swans, Fragility, and Mistakes

Related Articles

Excerpts from Taleb’s lecture at Oxford
Too Big to Fail, Hidden Risks, and the Fallacy of Large Institutions

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Eurozone in crisis: Debt, deficits & structural analyses – Free EXCLUSIVE report download


This graphic, from BBC, is part of an interesting piece: Eurozone in crisis

image showing national debt as a percentage. The UK is 68.1, Germany 73.2, Greece 115.1, Spain 53.2, France 77.6 and Ireland 64.

But, at Ontonix, we don’t rely solely upon [even the most reputable] news sources!

Although their qualitative analysis of the data is always interesting when it comes to measuring the “structural fragility” – based upon the same data sources – WE are the only firm able to provide a quantitative analysis to determine (amongst other things):

How fragile is the EU economy?

Using Eurostat quarterly data Ontonix have measured the structural fragility of  combined economies of the 27 member states. It is 49% (0% meaning a fully resilient system while 100% fragility corresponds to a system on the verge of collapse)…To view and download the

Q4 2009 EU Structural Fragility Report

An analysis of Q1 2010 will be available next month. With recent events and some of the information that has emerged about figures from Greece and Hungary (how many more?), that should make for some VERY interesting reading.

The structural fragility of a corporation, a market or an economy may be quantified by measuring its current complexity and the corresponding critical complexity. At critical complexity all dynamic systems become unstable and are characterized by a marked capacity to lead to unexpected and surprising behaviour. Therefore, the further a system functions from its critical complexity the more predictable and  resilient it is. Based on this logic the fragility of the combined economy of the 27 EU member countries has been analyzed in the period Q1 2005 – Q4 2009 and the fragility in Q4 2009 has been measured. For the scope, the following macroeconomic parameters have been used for each of the  countries:

•    External balance of goods and services
•    External balance – Goods
•    External balance – Services
•    Gross value added (at basic prices)
•    Gross domestic product at market prices
•    Gross operating surplus and gross mixed income
•    Compensation of employees
•    Taxes less subsidies on products
•    Taxes on production and imports less subsidies
•    Final consumption expenditure
•    Individual consumption expenditure of general government
•    Final consumption expenditure of households
•    Household and NPISH final consumption expenditure
•    Final consumption expenditure of NPISH
•    Collective consumption expenditure of general government
•    Domestic demand
•    Final consumption expenditure of general government
•    Gross capital formation
•    Gross fixed capital formation
•    Changes in inventories
•    Changes in inventories and acquisitions less disposals of valuables
•    Acquisitions less disposals of valuables
•    Exports of goods and services
•    Imports of goods and services

This leads to a total of 648 parameters. Quarterly data has been obtained from the Eurostat website.

Complexity-based fragility ratings focus entirely on structural aspects not on financial performance. A corporation may in fact perform very well and yet be fragile from a structural standpoint.

The current economic crisis has exposed the need to take a close look at systemic and holistic properties of markets and economies. A complexity-based systems approach exposes properties of  the dynamics of an economy that conventional techniques cannot. In fact, the meltdown of the economy on a global scale is proof of the limitations of contemporary econometrics.
Structural fragility of an economy is stratified into five levels:

(1) Very High: The economy has a weak structure. Exposure is very high. It is very difficult to make forecasts and define realistic goals.
(2) High: The structure of the economy is fragile and difficult to steer. Exposure is high. It is difficult to make forecasts.
(3) Medium: The economy has a moderately resilient structure. Exposure is limited and forecasts may be attempted.
(4) Low: The structure of the economy is robust. Exposure is low and it is possible to make realistic forecasts.
(5) Very Low: The structure of the economy is resilient and controllable.  Exposure is low.

The evolution of complexity of the combined 27 EU economies over the mentioned five-year period is illustrated below:

The constant rise of complexity since Q1 2005 indicates that from a global perspective the crisis in the EU has been maturing at a sustained rate. Complexity has peaked in Q4 2007 (see arrow) one quarter after the subprime bubble.  In Q1 2009 a sustained reduction in complexity commences, leading to pre-crisis levels in Q4 of 2009. In Q4 2009, the structural fragility of the system of 27 countries is  49% (0% means a resilient system, a 100% implies a system on the verge of collapse). This is equivalent to a medium fragility as illustrated below.

Even though complexity has reached pre-crisis levels, the structure of the combined economy is moderately resilient. Because of a globally turbulent economy, this fragility increases substantially the risk of financial contagion, domino effects and fast shock propagation.

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