- Explosion of debt: Japan's public debt could
reach as much as 270pc of GDP in the next two years. A bullet train is
pictured speeding past Mount Fuji in Fuji city, west of Tokyo Photo: Reuters
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- In a report entitled "Worst-case debt scenario",
the bank's asset team said state rescue packages over the last year have
merely transferred private liabilities onto sagging sovereign shoulders,
creating a fresh set of problems.
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- Overall debt is still far too high in almost all rich
economies as a share of GDP (350pc in the US), whether public or private.
It must be reduced by the hard slog of "deleveraging", for years.
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- "As yet, nobody can say with any certainty whether
we have in fact escaped the prospect of a global economic collapse,"
said the 68-page report, headed by asset chief Daniel Fermon. It is an
exploration of the dangers, not a forecast.
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- Under the French bank's "Bear Case" scenario,
the dollar would slide further and global equities would retest the March
lows. Property prices would tumble again. Oil would fall back to $50 in
2010.
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- Governments have already shot their fiscal bolts. Even
without fresh spending, public debt would explode within two years to 105pc
of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan.
Worldwide state debt would reach $45 trillion, up two-and-a-half times
in a decade.
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- (UK figures look low because debt started from a low
base. Mr Ferman said the UK would converge with Europe at 130pc of GDP
by 2015 under the bear case).
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- The underlying debt burden is greater than it was after
the Second World War, when nominal levels looked similar. Ageing populations
will make it harder to erode debt through growth. "High public debt
looks entirely unsustainable in the long run. We have almost reached a
point of no return for government debt," it said.
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- Inflating debt away might be seen by some governments
as a lesser of evils.
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- If so, gold would go "up, and up, and up" as
the only safe haven from fiat paper money. Private debt is also crippling.
Even if the US savings rate stabilises at 7pc, and all of it is used to
pay down debt, it will still take nine years for households to reduce debt/income
ratios to the safe levels of the 1980s.
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- The bank said the current crisis displays "compelling
similarities" with Japan during its Lost Decade (or two), with a big
difference: Japan was able to stay afloat by exporting into a robust global
economy and by letting the yen fall. It is not possible for half the world
to pursue this strategy at the same time.
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- SocGen advises bears to sell the dollar and to "short"
cyclical equities such as technology, auto, and travel to avoid being caught
in the "inherent deflationary spiral". Emerging markets would
not be spared. Paradoxically, they are more leveraged to the US growth
than Wall Street itself. Farm commodities would hold up well, led by sugar.
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- Mr Fermon said junk bonds would lose 31pc of their value
in 2010 alone. However, sovereign bonds would "generate turbo-charged
returns" mimicking the secular slide in yields seen in Japan as the
slump ground on. At one point Japan's 10-year yield dropped to 0.40pc.
The Fed would hold down yields by purchasing more bonds. The European Central
Bank would do less, for political reasons.
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- SocGen's case for buying sovereign bonds is controversial.
A number of funds doubt whether the Japan scenario will be repeated, not
least because Tokyo itself may be on the cusp of a debt compound crisis.
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- Mr Fermon said his report had electrified clients on
both sides of the Atlantic. "Everybody wants to know what the impact
will be. A lot of hedge funds and bankers are worried," he said.
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- http://www.telegraph.co.uk/finance/economics/6599281/Societe-
- Generale-tells-clients-how-to-prepare-for-global-collapse.html
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