By: Nadeem_Walayat

The bottom line is that the mainstream press is good at looking in the rear view mirror and telling your what has already happened, but because they lack the fundamental mechanism of profit and loss in their analysis they will by wrong at least 80% of the time on any market or economic outlook, think about that, even a coin toss is a 50/50 proposition!

b. That the debt crisis calls for money printing, regardless of what the politicians and central bankers state this is what will follow as we are witnessing with the latest Euro 109 billion bailout of Greece that is a stepping stone towards a Euro-bond with all of the ramifications it will have for the core Euro-zone interest rates.

c. That the PIIGS will default on their debts, infarct Greece and Ireland HAVE defaulted because the borrowers are being forced to except longer terms and lower interest rates than the market interest rates, a so called orderly default is taking place.

The announced orderly default does NOT solve anything, because Greece is still left with a huge and growing debt mountain, so this is just another milestone on the path towards further defaults. All the Euro-zone has done is to buy some more time for Greece.

Therefore depositors need to continue to protect themselves against PIIGS defaults and the Inflation Mega-trend (see my last article of 29th June 2011), as bond holders are being marched towards loss of capital so will ultimately depositors, in one way or another, in the UK it is stealth default by means of high Inflation, in the likes of Greece it is in your face default.

PIIGS Lesson for U.S. and UK on Interest Rates

Central bankers in the US and UK have managed to get away with murder where interest rates are concerned that especially in the UK lag far behind even the highly suspect official CPI inflation rates. However as the soaring PIIGS market interest rates of as high as 30% illustrate that UK and US interest rates of 3% on 10 year debt is NOT sustainable especially as debt to GDP levels continue their inexorable trend to above 100% of GDP even after most of the real debt and liabilities have been excluded from the calculations, therefore official debt is just the tip of the ice-berg much as UK and US bank exposure to PIIGS debt is just the tip of the ice-berg of potential losses as it excludes derivatives positions such as CDS.

The experience of the PIIGS and history before them has shown that failure to get a grip on budget deficits, debt and future liabilities WILL result in sharply higher market interest rates even if the Bank of England and the U.S. Fed remain deaf dumb and blind to their own debt crisis as they point the finger at the likes of Greece today.

The problem is that most people won’t realise how bad the current debt crisis is in the UK and USA until they actually have to face the consequences PIIGS style of soaring market interest rates even if the irrelevant official rates remain stuck at near 0%. This public reluctance to face reality of unsustainable deficit spending is manifesting itself in public sector workers demonstrating and striking against cuts without which the markets WILL force the governments hands who will respond with not 4.2% UK CPI Inflation but panic level of money printing that pushes inflation rates to above 10%.

Therefore the imperative remains for the UK and US government to focus on cutting the budget deficits asap whilst they have it in their means to do so rather than be forced to act by the markets.

U.S. Debt Ceiling Smoke and Mirrors Political Game

The mainstream press is telling you that a US default as a consequence of failing to agree on raising the debt ceiling will be catastrophic, well the only place your seeing this catastrophe being played out is in the mainstream press for it is invisible to the US stock and bond markets, after all the Dow is barely a couple of percentage points away from its bull market high!

As of writing there is no agreement between Obama and Boehner and apparently the deadline is imminent for action to ensure millions of cheque’s do not bounce.

As ever, the name of the gave is managing your risk, and the greatest risk is to depositors who run real risks of loss of capital for a mere pittance in interest that is at half the rate of inflation and does not reflect the risk they are exposed to, so if you have not already done so, go see my last article on what depositors should do to protect their wealth.

Whilst U.S. Bonds may have rallied on the debt woes of others but ultimately bond bulls will lose, because bond holders are betting on deflation instead the opposite is true as you don’t get deflation on a annual budget deficit of 11%, which is why stocks are rising i.e. as a manifestation of the inflation mega-trend NOT deflation mega-trend which would see the opposite to the be true aka early 1930′s wipeout.

I just do not understand why so many people are fixated on a re-run of the 1930′s for these past few years when the opposite has been transpiring as I warned of well over 18 months ago in the Inflation Mega-trend ebook. Instead the early 1930′s chart gets rolled out with an amended start date because it has turned out to be wrong for over 2 years now and some 100% on the stock indices, so yes, this does mean there would need to be a 50% crash in stock prices just for the deflation fools to break even let alone make money on worthless calls such as the Dow falling to below 1000. At the end of the day perpetually shorting of stocks that these bear market fools are engaged in and propose to others to do, is an unlimited liability risk as the upside is unlimited i.e. 100%, 200%. 300%,. demanding perpetual financing of short positions for ever, whereas the maximum Long risk is always limited to 100%. Therefore I am always far more careful in the management of short positions than long positions given the risks, especially when virtually all trading activity is further leveraged by X10 upwards.

The bottom line is that the debt ceiling political show is just that, a show for the electorate and mainstream media talking heads, whatever happens is irrelevant to the long term megatrend’s, and if there is any short-term panic, I will once more be seeking buying opportunities.

In fact if the debt ceiling talks do fail and the US government is forced to balance its books as a consequence of a freeze on spending, then that would be GOOD for the US Economy as instantly the federal spending will be cut by some 50%, so the market may take the opposite view on the future prospects for the US economy than that of financial armageddon being pumped out by the mainstream press and BlogosFear.

full article at source: http://www.marketoracle.co.uk/Article29471.html