Behind The Scenes

From Bloomberg:

Portugal's Bond Rating Cut

Portugal’s long-term debt rating was cut two steps by Moody’s Investors Service, which cited a “subdued” growth outlook, risks to implementing the government’s deficit-reduction plans, and a possible need to recapitalize its banks.

The rating was downgraded to A3 from A1, the company said today in an e-mailed statement, adding that the outlook is “negative.” The euro weakened against the dollar after Moody’s announcement, to $1.3978 per euro from $1.3998.

Portugal is raising taxes and implementing the deepest spending cuts in more than three decades, aiming to convince investors it can curb its debt, narrow its budget gap and avoid a bailout after the Greek debt crisis led to a surge in borrowing costs for high-deficit euro nations. Moody’s says its rating takes into account measures announced by the government last week.

From Elliott Wave International.


While the eyes of the world are focused on the terrible events in Japan, Libya, Yemen, and Bahrain, the financial system in Europe and the US continues to decay as sovereign debt levels rise.

Analogous to this is a farmer who breeds  Black Swans - each swan has laid 10 eggs and they are showing signs of hatching.

Indeed, what kinds of black swans are going to hatch next?

We need to consider the consequences of the Libyan War of 2011.

A map from Stratfor follows:

Gadhafi’s primary capabilities are conventional armor and particularly artillery. Destroying his air force and isolating his forces will not by itself win the war. The war is on the ground. The question is the motivation of his troops: If they perceive that surrender is unacceptable or personally catastrophic, they may continue to fight. At that point the coalition must decide if it intends to engage and destroy Gadhafi’s ground forces from the air. This can be done, but it is never a foregone conclusion that it will work. Moreover, this is the phase at which civilian casualties begin to mount. It is a paradox of warfare instigated to end human suffering that the means of achieving this can sometimes impose substantial human suffering itself. This is not merely a theoretical statement. It is at this point at which supporters of the war who want to end suffering may turn on the political leaders for not ending suffering without cost. It should be remembered that Saddam Hussein was loathed universally but those who loathed him were frequently not willing to impose the price of overthrowing him. The Europeans in particular are sensitive to this issue.

Read more: The Libyan War of 2011 | STRATFOR

The question that arises is not only:

1) How long is the International Coalition prepared to fight a war to provide a decisive outcome?

2) How long will the bond market finance the cost of such a fight when the sovereign debt levels in many European countries are at record or near record levels?

3) If the bond market insists on higher yields, at what point do Central Banks and Treasuries ease back on QE and spending, or ratchet up money printing to pay for the war? 

In the QE scenario, severe inflation or even hyperinflation become much more likely rather than just an abstract theoretical argument.


  1. There is a point of no return. Greece, Portugal... they will try because they are forced.
    But what about USA ? Who will force them to cut their budget (the war machine !!). And this will be the biggest mistake and failure, leading the entire world to a financial disaster.

  2. Yes Anonymous at 6:46pm, this is my concern. Budgeting is a zero sum game in the long run, and we have not seen surpluses of significance for decades. A default in the reserve currency is a frightening prospect but, eventually, the bond market will be the force of discipline.


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