Tito's Blog

Decision Tree For Sovereign Debt Analysis

Nice decision tree useful to structure an analysis of sovereign debt, via RBS and ZeroHedge

Over $5 Trillion Of Government Bonds Issuance In 2010

and that excludes emerging markets …

• $2,000 billion in the US
• €1,000 ($1,500) billion in the Eurozone (up from €600B in 2008 and €900B in 2009)
• Y149,204 ($1,658) billion in Japan (up from $1,535 billion in 2009)

Source: FT.com / Capital Markets - Threat from large budget deficits looms

Money Supply Is Indeed Just Going Down

Even looking at money supply figures, there’s nothing else than signals of deflation ahead. As Ambrose Evans-Pritchard points out in his article, money supply is decreasing rapidly.

M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.

If one adds declining credit to the collapse in the securitization machine, that was the real liquidity fire hose, it seems that there is no limit to the amount of money central banks should print to counter such strong deflation forces.

Until of course the bond market reaches a tipping point and there will be no buyers for government bonds, except central banks themselves. I wonder what it takes to get there since the Fed is already monetizing half of treasury issues and 80% of mortage-backed securities.