The Game of Perpetual Debt

Sydneysiders make a big deal out of Melbourne’s weather. Perhaps rightly so – we’ve never stayed long enough to find out what it’s really like. But walking the streets of sunny St Kilda this morning (actually, it’s cloudy and a bit dull) we came to the conclusion that Melbourne is not that cold. Not as much as the propaganda from Sydney would have you believe, anyway.

And we weren’t particularly rugged up, either. Our coat strangely disappeared in the pub last night. So the morning walk was just in a long sleeve shirt. We don’t know what it is. But 8 degrees in Sydney feels colder than 8 degrees in Melbourne.

There’s no chill in the markets though. The Dow Jones and the S&P are on fire. The investment world is ‘shrugging off’ all the problems being hurled at it. Greece, Ireland, Portugal, China raising rates, the end of QEII. No worries.

That’s the way it works in a world dominated by the all-pervading power of central banks. There’s seemingly no problem that can’t be fixed by printing money or allowing banks to borrow for almost zero cost.

And now the European Central Bank has found a way to set monetary policy for Germany and France, without punishing the weaker countries. Overnight, the ECB increased rates by 25 basis points to a whopping 1.5 per cent.

But it’s not just interest rates that are changing. The rules of the game are as well. The FT reports:

The euro recovered from session lows against the dollar after the European Central Bank said it had decided to suspend the minimum rating requirement threshold for Portuguese government debt that can be used by banks as collateral for loans from the central bank.

The move followed a sharp drop in the single currency on Wednesday as a downgrade of Portuguese government debt sparked fresh concerns over financial contagion from the eurozone debt crisis, sending the yields on the government debt of countries on the periphery of the region higher.

“The decision by the ECB to suspend collateral rules for Portugal is clearly a direct, and rapid, response to the downgrade we saw for Portugal earlier in the week,” said Charles Diebel at Lloyds Bank Corporate Markets

“As such, they signal their determination to keep liquidity provision channels open almost at any cost.”

Substitute ‘change’ for ‘suspend’ and you have the story. Central bank balance sheets in the world’s main financial centres are becoming a repository for dodgy debt – the stuff that won’t be repaid or serviced.

The central bankers think they have found a way to prolong the game of perpetual debt. And in a way they have. Take the debt out of the private market, refuse to write it down to its true value and think that no one will notice.

But the market will notice, eventually. We have no idea when ‘eventually’ comes, but it will be when you least expect it. A currency is only as good as a central bank’s balance sheet. And the deterioration you’re seeing will eventually (there’s that word again) destroy currencies. Which will in turn create major social upheaval.

Lenin knew all about it. He said the best way to overturn capitalist society was to debauch the currency. That’s what happening, imperceptibly, now. It will be a slow-motion train wreck that no one notices until it’s all too late.

Many think that a good crisis is what’s needed to return to free market principles and ensure the economy can again grow in a sustainable way. We’d love to think that but it’s not realistic.

We had a good crisis in 2008 but it was used by the elites to gain greater power. Insanely, when there’s a crisis society looks to those who caused it for relief and salvation. Unless change is demanded, we’ll just get more of the same.

And more of the same means that eventually we all become Greece, without the good bits. The quote below is worth pondering. It is taken from an essay written in February 2010 by Anita Acavalos about Greek society’s political attitude. It also demonstrates why politicians are not there to help you. They are there to spend your money and entrench their own power.

…in regions that are liable to sway either way politicians have a built in incentive to promise the constituents more than everyone else. The result is almost like a race for the person able to promise more, and thus the system seems by its very nature to weed out politicians that tell people the honest and unpalatable truth or disapprove of handouts. This has led people to think that if they are in a miserable situation it is because the government is not trying hard enough to satisfy their needs or is favouring someone else instead of them. When the farmers protest it is not just because they want more money, it is because they are convinced (sometimes even rightly so) that the reason why they are being denied handouts is that they have been given to someone else instead. It is the combination, therefore, of endless government pandering and patronages that has led to the population’s irresponsible attitude towards money and public finance. They believe that the government having the power to legislate need not be prudent, and when the government says it needs to cut back, they point to the rich and expect the government to tax them more heavily or blame the capitalist system for their woes.

Greg Canavan
Markets and Money Australia

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

Leave a Reply

3 Comments on "The Game of Perpetual Debt"

Notify of
Sort by:   newest | oldest | most voted

Personally all you can do is:

Get out of debt servitude,
Always vote against the usually corrupted sitting member,
Consume less junk and save more money,
Support, instead of denigrating anti-bank protesters,
Read more non-mainstream views about the world,
Try and grow some of the stuff you eat.

Unfortunately the central bankers are going to cause change and pain, ask the Greeks.

Ned S

“… the system seems by its very nature to weed out politicians that tell people the honest and unpalatable truth …”

20th-century American social critic and humorist H. L. Mencken, defined a demagogue as “one who will preach doctrines he knows to be untrue to men he knows to be idiots.” :

See Demagogy on Wiki.


I haven’t seen Biker Pete peddling property investment lately. I’m sure he’s busy trying to calculate all those heady gains he’s about to make…
You guys at DR are putting some top articles out recently I must say. Thanks for years of free intellect and keep em coming! Off to look into graphene a little closer..

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to