The three primary factors that determine the interest rate level a nation must pay to service its debt in the long term are; the currency, inflation and credit risks of holding the sovereign debt. All three of those factors are very closely interrelated. Even though the central bank can exercise tremendous influence in the short run, the free market ultimately decides whether or not the nation has the ability to adequately finance its obligations and how high interest rates will go. An extremely high debt to GDP level, which elevates the country's credit risk, inevitably leads to massive money printing by the central bank. That directly causes the nation's currency to fall while it also increases the rate of inflation.

It is true that a country never has to pay back all of its outstanding debt. However, it is imperative that investors in the nation's sovereign debt always maintain the confidence that it has the ability to do so. History has proven that once the debt to GDP ratio reaches circa 100%, economic growth seizes to a halt. The problem being that the debt continues to accumulate without a commensurate increase in the tax base. Once the tax base can no longer adequately support the debt, interest rates rise sharply.

Europe's southern periphery, along with Ireland, has hit the interest rate wall. International investors have abandoned their faith in the bond market and these countries have now been placed on the life support of the European Central Bank. Without continuous intervention of the ECB into the bond market yields will inexorably rise.

The U.S. faces a similar fate in the very near future. Our debt is a staggering 700% of income. And our annual deficit is over 50% of Federal revenue. Just imagine if your annual salary was 100k and you owed the bank a whopping 700k. Then go tell your banker that you are adding 50k each year-half of your entire salary--to your accumulated level of debt. After your bankers picked themselves off the floor, they would summarily cut up your credit cards and remove any and all existing lines of future credit. Our gross debt is $15.6 trillion and that is supported by just $2.3 trillion of revenue. And we are adding well over a trillion dollars each year to the gross debt. Our international creditors will soon have no choice but to cut up our credit cards and send interest rates skyrocketing higher.

When bond yields began to soar towards dangerous levels in Europe back in late 2011 and early 2012, the ECB made available over a trillion Euros in low-interest loans to bailout insolvent banks and countries. Banks used the money to plug capital holes in their balance sheets and to buy newly issued debt of the EU nations. That caused Ten-year yields in Spain and Italy to quickly retreat back under 5% from their previous level of around 7% just a few months prior. But now that there isn't any new money being printed on the part of the ECB and yields are quickly headed back towards 6% in both countries. There just isn't enough private sector interest in buying insolvent European debt at the current low level of interest offered.

The sad truth is that Europe, Japan and the U.S. have such an onerous amount of debt outstanding that the hope of continued solvency rests completely on the perpetual condition of interest rates that are kept ridiculously low. It isn't so much a mystery as to why the Fed, ECB and BOJ are working overtime to keep interest rates from rising. If rates were allowed to rise to a level that could bring in the support of the free market, the vastly increased borrowing costs would cause the economy to falter and deficits to skyrocket. This would eventually lead to an explicit default on the debt.

But the key point here is that continuous and massive money printing by any central bank eventually causes hyperinflation, which mandates yields to rise much higher anyway. It is at that point where the country enters into an inflationary death spiral. The more money they print, the higher rates go to compensate for the runaway inflation. The higher rates go the worse economic growth and the debt to GDP ratio becomes. That puts further pressure on rates to rise and the central bank to then increase the amount of debt monetization...and so the deadly cycle repeats and intensifies.

The bottom line is that Europe, Japan and the U.S. will eventually undergo a massive debt restructuring the likes of which history has never before witnessed. Such a default will either take the form of outright principal reduction or intractable inflation. History illustrates that ownership of gold will provide a safe harbor for your wealth when paper currencies are being inflated into oblivion.

Continued here:
The Anatomy of Sovereign Default

Tuesday, April 17th, 2012 at 12:45 pm | 3 responses

A scattering of thoughts on Princeton, Pete Carril and basketballs most deliberate system.

by Nick Rotunno

As basketball fans across America recovered from a wild, bracket-busting weekend of March Madness, the Princeton University mens team quietly wrapped up the 11-12 season on March 19, falling to the Pitt Panthers in the quarterfinals of the College Basketball Invitational (CBI). Almost no one noticed, because the CBI is an unceremonious little tournament for mostly average teams, and the national media had bigger things to write about.

The game was played in Pittsburgh on the Panthers home floor, and Princeton was wholly outmatched. By halftime Pitt had built a 24-point lead, and the Panthersout-shooting and out-rebounding the smaller Princeton squadcruised to an 82-61 victory. The Tigers hung around in the early going, but Pitts Big East bruisers were too much to handle.

According to the Princeton athletics website, the only good news for the Tigers concerned senior guard Douglas Davis, whose game-high 20 points moved him into second place on Princetons all-time scoring list (1,550 career points). An impressive achievement, to be sure, but Davis is still a long way from the incomparable Bill Bradley, the Tigers all-time scoring champion, who tallied a staggering 2,504 points in just three seasons of college ball, before the era of the three-point line. Bradleys total is all but unreachable, though Davis gave it a solid try.

Princeton finished a respectable 20-12 this season (11-4 in the Ivy League). It was an up-and-down year for head coach Mitch Henderson and the Tigers: Princeton kicked off the schedule with a head-scratching home loss to Wagner, nearly beat North Carolina State in Raleigh four days later, won a few, lost a few, then defeated Rutgers 59-57 on December 7. In the conference season, Princeton split with archrival Harvard, but the Crimson played well all winter, won the Ivy League and earned a berth in the NCAA Tournament (they didnt make it very far). The boys from New Jersey had to settle for the CBIPrinceton beat Evansville in the first round before getting hammered by Pitt.

All told, the Tigers 11-12 campaign was a moderate success.

So why spill so much ink on a mediocre team, after an unspectacular season? A fair question. To be honest, Ive never been to Princeton, NJ, and Ive never watched the Tigers play live. Princetons favorite son, the aforementioned Bill Bradleyone of the greatest college ballplayers of all time and a former US Senatorplayed his last game for the Black-and-Orange two decades before I was born. Aside from my natural love of the underdog, that very American tendency to root for the gutsy overachiever (and my idolization of John McPhee, Pulitzer Prize-winning author and teacher of nonfiction writing at Princeton), I have no real connection to the program.

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Anatomy of An Offense

Global killer ... scientists have pinpointed the origin of the AIDS virus from chimp to human in Cameroon. Photo: Reuters

Following a trail of death, Craig Timberg and Daniel Halperin tell the grim story of the birth and spread of AIDS.

WE are unlikely to ever know all the details of the birth of the AIDS epidemic. But a series of recent genetic discoveries have shed new light on it, starting with the moment when a connection from chimp to human changed the course of history.

We now know where the epidemic began: A small patch of dense forest in south-eastern Cameroon. We know when: Within a couple of decades on either side of 1900. We have a good idea of how: A hunter caught an infected chimpanzee for food, allowing the virus to pass from the chimp's blood into the hunter's body, probably through a cut during butchering.

As to the why, here is where the story gets even more fascinating. We typically think of diseases in terms of how they threaten us personally. But they have their own stories. Diseases are born. They grow. They falter and sometimes they die. In every case, these changes happen for reasons.

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For decades, nobody knew the reasons behind the birth of the AIDS epidemic. But it is now clear that the epidemic's birth and crucial early growth happened during Africa's colonial era, amid massive intrusion of new people and technology into a land where ancient ways still prevailed. European powers, engaged in a feverish race for wealth and glory, blazed routes up muddy rivers and into dense forests that had been travelled only sporadically by humans before.

The most disruptive of these intruders were thousands of African porters. Forced into service by European colonial powers, they cut paths through the exact area that researchers have now identified as the birthplace of the AIDS epidemic. It was here, in a single moment of transmission from chimp to human, that a strain of virus called HIV-1 group M first appeared.

In the century since, it has been responsible for 99 per cent of all of the world's deaths from AIDS not just in Africa but in Moscow, Bangkok, Rio de Janeiro, San Francisco, New York and Washington. All that began when the West forced its will on an unfamiliar land, causing the essential ingredients of the AIDS epidemic to combine.

It was here, by accident but with motives by no means pure, that the world built a tinderbox and tossed in a spark.

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Anatomy of a plague

Students in the anatomy lab at Edward Via College of Osteopathic Medicine school of medicine. Chuck Frost, Bralin Bean, Jenna Bates, Nate Benitez, Adam Boiter, Chris Bazemore, and Nate Moore.

The anatomy lab at Spartanburg's new medical school can accommodate 193 bodies, 165 of them alive.

The 28 remaining are human cadavers, subjects of intense scrutiny for the first-year students at the Edward Via College of Osteopathic Medicine.

"Probably the most difficult thing an American medical student has to do is understand human anatomy," said Dr. Lance Paulman, a professor of anatomy at VCOM. "They take the body apart so they can learn to put it back together."

The students have worked with the same bodies since September, when the school opened, and now they're planning a memorial service on Friday in Columbia to honor the deceased.

The University of South Carolina runs the Gift of Bodies program, which allows people to donate their bodies to science after they die. Their gift provides bodies for the USC's medical school and VCOM. The service is a chance for students to honor that gift.

"They get to explain to the families (of the deceased) how beneficial their loved one's gift has been," Paulman said.

The students only learn the age, cause of death and primary occupation of the dead person they are assigned. But they learn much more about the body.

They make incisions and remove the skin. They look at the musculoskeletal system, the placement of the body's organs, and the interconnectedness of all of its systems.

"Until you go in and you see it and you look at those relationships, that's when it really hits home," said Randy Baxley, 36, a VCOM student. "You don't realize who's whose neighbor."

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Anatomy students at Edward Via honor those who donated bodies to science