Gregor Weekly Macro Note: Saturday 28 November 2009

• Gregor Macdonald
• November 28th, 2009

On Thanksgiving Day I found myself thinking of Bear Stearns. The Dubai event makes for a kind of fearful symmetry with the February/March 2007 shock, in which the framing around Bear was that it had been caught up in “subprime.” As foretold by the problems with many mortgage brokers 6 months before, and then preceeding the further troubles the following Summer, the Bear event was instructive because it precipitated expert reaction and was a good gauge of everyone’s grip on reality. Indeed, the Dubai event is already triggering memorable verbiage: in a case of macro-funhouse mirrors, the Prime Minister of The UK Gordon Brown was quoted just yesterday as saying ‘he was confident the debt troubles are containable.’

My reaction was different. It’s not so much that I see Dubai as ground zero for the next phase of the crisis. Nor do I see Dubai as causal to the next phase. Rather, I’ve simply been waiting to see when the next phase would break out. My countdown clock to even more serious trouble, therefore, has now begun.

The piles of broken debt from the bursting of the credit bubble have now, to either lesser or greater extent, been transferred to the sovereign balance sheets of countries like the UK, and the US. Once there, market observers have a hard time assessing outcomes. Here’s why: the world has lots of experience understanding how smaller, developing nations can go bankrupt and default on their debt. Less clear is how developed nations default. After all, the financial world is relative–not absolute. A crashing Rouble, a Parisian debt club to reschedule and forgive Argentinian debt–these have meaning in a world where senior currencies and their government bonds are stable. But what happens when the structural rot has migrated to the UK, US, and Japan?

The aggregate debt positions of these countries was of course a serious concern before the crisis. The crisis merely exposed the problem once the credit bubble had expanded far enough to be halted by its natural limits. (this article continues for subscribers through the membership gateway, on the right side of this page)

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More from Gregor Weekly

• Gregor Weekly Macro Note: Saturday 07 November 2009
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Tickers: debt US, default, Japan, Sudden Stop, UK