World Roulette

This decade of quantum reality and quantum risk must have been foreseen by Charles Dickens:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

Charles Dickens,
English novelist (1812 - 1870), A Tale of Two Cities

Applying Dickens' wisdom to Europe: Europe will break up, Europe will survive.......    Who knows?

Let's dive a little deeper to find out what's happening.

Different interests
First of all different countries in Europe have different interests in the outcome of this debt crisis as the next charts (2010 data) of the Telegraph (nov 2011) show:


Update
It's hard to get actual data on this subject (how about transparency?), however the 'Deutsche Bundesbank' opens up a bit, as the next table shows:

This table (3) clearly shows that Germany is increasingly funding the poor (default) positions of a number of countries.

Countries like Ireland, Greece, Portugal and Spain are in an extremely difficult and hopeless position.

Even France is 'on the wrong side' and moving in the wrong direction.....

As long as these bad performing countries are not showing any progress in getting their national finance under control and diminishing their debt, other countries like Germany, Luxembourg and The Netherlands are  throwing the money of their citizens into the bottomless pit of countries that can't take care of themselves.

As long as Europe cannot force individual member states to take appropriate measures, it's on a on a collision course and will eventually default.

For years now, Germany is putting a lot of energy and - even more - financial support in keeping Europe alive.

Despite this laudable way of acting, it's clear that if other countries don't catch up, the end of Europe is in sight.

The most horrible scenario is of course: a major (hyper)inflation in Europe.

Therefore, Germany, Luxembourg and The Netherlands would be wise to finance other countries only on basis of inflation-indexed-loans.

This way countries can't escape by means of (stimulated)  inflation.

Different types of roulette
The situation above is like a desperate German player in a casino in a lonely town.......

His European family lost a fortune that night....

In order to 'save' his family, he takes his 'responsibility' and decides to play 'double or nothing' by putting all his money on 'red' and hope for the best.

Meanwhile, his family continues to gamble on the other casino  tables, as if nothing has happened.

As Germans can calculate like no other, our Bundes-player knows he eventually can not win at roulette. But he has to play to prevent a family default.

Unfortunately, the German player doesn't realize he's not playing 'normal' European roulette, based on one green pocket.......

NO.., it's getting worse.......

Our German player is not even playing American roulette, with two green pockets and (therefore) less chance of winning.....

In fact our unlucky German friend is playing a kind of 'World roulette'..... as this inevitable European Debt Game will infect the world economy....

In 'economic practice' the situation is more risky than at the roulette table, as with roulette you can exactly calculate your probabilities, while in 'real life' you are not sure of your probabilities.

That's what Risk Management is all about, isn't it?

Keep following Europe the next months, as this story will continue.....



Next blog.... better news! 

Sources/Related Links:
- DBB:Euroland's hidden balance-of-payments crisis
- Bundesbank sinks deeper into debt saving Europe

- Bank exposure data (Bank for International Settlements, table 9D)
- Debt as percentage of GDP and total debt (Eurostat).
- ECB Stats

Actuary Thyl Ulenspiegel?

Anyone with a little mother wit knows one plus one equals exactly two, not more, not less.

Smart people, like the historic Thyl Ulenspiegel, made a profession out of counting. Every time bystanders gave Thyl the choice between a rix-dollar (a 'two and a half dollar' coin) or 2 dollars coins, he opted for the 2 dollars.

"Two is more than one", Thyl - clearly not an actuary - used to say. People felt pity for 'poor Thyl Ulenspiegel'. That someone like him could be that stupid!


Modern Counting
Today (2009) little has changed. Modern gurus made us believe that, through M&A's, synergy, cooperation, in or outsourcing, the whole becomes greater than the sum of the parts. One plus one could easily equal three or even more.

However, research has shown that the majority of mergers and acquisitions fail. Hindsight shows that one plus one doesn't add up to three, but only to one point five, or in some cases even to zero. Cause? Synergy benefits and future market are extremely overestimated and cultural differences, despite continued 'slippery warnings', remain underestimated.

Shareholders and management of an acquired company cash their future notional profit surplus, that -at first - appears in the balance sheet as 'goodwill' and than subsequently, over the years, becomes visible as a loss in the P&L.

However there are other modern counters - not actuaries - that can even do better, as will be illustrated next.

Some youth memories never fade..
As a young boy I discovered an unstamped stamp in the attic of our house.

The stamp was worth 50 billion Deutsche Mark, dated 1923.

Completely overwhelmed I tumbled down the stairs to report my parents we'd become billionaires.

A few minutes later, completely disillusioned, I'd learned a new word: Hyperinflation.


Hyperinflation
The hyperinflation back in the twenties of the the last century is only a trifle of the current (hyper) credit inflation:

U.S. $ 1.000.000.000.000

A trillion dollars, the Fed 'invests' in buying up debt. By coincidence this equals the amount of money that Europe, the G20, will be pumping in the economy.

For all of 2009, the U.S. administration probably needs to borrow about $2 trillion. That money doesn't really exist, but that's no point of concern! The debt crisis is simply solved with more debt. What was not legitimate for the banks, is now legitimate for the 'bankruptcy proof government'. Frankly, my intuition really starts to falter now ...

Russian Credit Roulette
Modern Ulenspiegels, playing a variant of 'Russian Credit Roulette', have now left the roulette tables. With borrowed money, doubling their bet for five consecutive times in a row, they bet and lost on 'credit red'.

Instead of taking their loss, the government has taken their place at the table and decided to double the bet on red for the sixth time in a row, now playing for a trillion dollars.

All of this under enhanced risk management, governance and supervision of course.

To get a really confident feeling: the probability of consecutive six times black seems both rational and intuitive almost impossible, but is in any case less than the "safe" smaller 2.5% ruin probability (2.5% probability of insolvency) of a pension fund. Some people state there's light at the end of the 'financial crisis' tunnel.

Now let's hope this light is no oncoming train and roulette tables turn out to have a memory after all.

Maybe it's time actuaries get involved in government finance....