Today’s ‘shock/disappointing/surprise’ rise in public sector borrowing was the result of (yawn) for the umpteenth time, a rise in borrowing costs. To be technically exact, it was the result of having to give a bigger yield back on index-linked gilts because there was a ‘shock/disappointing/surprise’ rise in the inflation rate. But it amounts to the same thing: why did we have to issue index linked gilts? To be sure of getting the sale away. And why did the inflation rate go up? Because with a weak Pound, the cost of raw materials rose. And why was there a weak Pound? For the same reason we had to offer index-linking: we’re a basket case that nobody trusts.

This sort of relatively simple commercial market lesson – which, by the way, is also a lesson in Anthropology for Dummies on the subject of trust – bounces off the skull of all those on the Left – and the well-meaning Fluffies who cling to a similar ignorance for comfort in times like these. But there is also a mathematical dimension which (I was told last year by a hugely experienced wealth manager) overrides any politically-induced density, and it is to do with the human being’s great difficulty in grasping all things exponential.

That’s merely a fancy way of saying that most of us are OK with addition and subtraction, and sort of good with simple multiplication. But add in the element of compound growth, and most folks – even otherwise very bright folks – don’t get it at all. (I might add that without this human frailty, credit cards would never have got off the ground – nor indeed mortgages).

I’m sure you’ve all seen those diagrams showing how two mice can produce 83 billion mice if left alone for more than a few minutes; well it’s the same with borrowing – and it gets worse the more you owe, for two reasons: one, people spot that you’re a spendaholic and so charge you more, and two, like each generation of mice produces ever-bigger multiples of mice, so too every unpaid bill carried over ‘compounds’ into a snowball.

You borrow £1 million over ten years at £120,000 payback per year. Stick to the schedule, and you’ll pay back £1.2 million.
But let’s say you keep on spending too much, and halfway through the schedule restructure the debt as follows: £600,000 paid back after five years including interest, but the remaining £600,000 to be paid back over eight years at a 50% higher rate because you’re clearly an unreliable debtor….and want more time.
So now you’ve gone from a debt of £1million over ten years to one of £1.4million over eight years. You owe 40% more, with 20% less time to pay it.
On and on it goes, until one day you become a debt addict: all your money goes each and every day just to feed the habit….aka, the interest.

Yes, my brain hurts too – but I suspect you can see where I’m going on this. International lending and debt management is a game of poker. You the lender have to gauge very carefully whether your borrower is simply beyond help: lend him too much, and you’ll lose the lot. And the borrower has to decide how much he must pay back in order to retain the lender’s trust: fall too far behind, and he might foreclose. I had chums at University who played this game with their bookies week in, week out.

In real life at the outer fringes of debt, the borrower winds up getting the direction of his kneecaps changed at some point. But in the world of international business and diplomacy, it seems at first sight far more gentlemanly than this. Underneath that diaphanous cover, however, it’s likely to get very nasty indeed.

Because most socialists have an amoral attitude to debt owed to capitalists, their natural inclination is just to smile and default. One could just see Harriet Harman doing this, with the words “You know where to find me”.

Many South American socialist countries did it in the 1970-1990 era. Typically, once again idiotically greedy banks had let them get in far too deep, and wound up losing their shirts. (They soon replenished their tailoring by charging you and me the customer more to get access to our own o% interest ‘sight’ money, but that’s another story for another day.)

So: banks have a wobble, and charge customers more; and everyone gets a bit irate – but nobody dies. Is that it? No, it most certainly isn’t. These days, the stakes are much, much higher.

There are myriad reasons why, but let’s try and keep it straightforward…even if that does mean the odd banker wiseass writing comment threads about my analyses being risibly simplistic.

Today – some 25 years after Big Bang brought us untold wealth and infinite happiness – two main things are different. First, specialist banking in the sovereign debt sector is so big and so inextricably connected to other sectors in hundreds of markets, the default of a sovereign State can set off a chain-reaction to make Hiroshima look like a belch. Right now, the EU and the UK
are full of banks where just one sovereign default could bankrupt three banks overnight, and two would destroy the entire banking system of the eurozone. If one of those defaulters was Russia or Spain, it would wipe out that nice M. Trichet’s Central Bank too.

Second, not only have sovereign States convinced themselves that the new paradigm means debt economics are the new black, the rise of Asian surpluses ensured most of those bonkers borrowers would owe the money to China. And China is beginning to look more and more like a ruthless imperial power. Not just a ruthless one-Party State driving tanks over dissenters, but also one befriending weak countries with mineral wealth – and quietly annexing most of Africa. Of late in fact, a ruthless manipulator of currency values and trade via the use of its debt ownership.

My endpoint here is very obvious: smile and default is no longer an option for anyone above Zimbabwe or some other obscure third world dump. Default will mean at least financial destruction on a grand scale, and quite possibly a geopolitical catastrophe.

These are the factors which ought to be borne in mind by leather-elbowed economics professors (and the Observer’s financial journalists) when they suggest that all this cutting and slashing business is just The Nasty Party doing what it does best.

These are the factors ensuring that, joking apart, Jean-Claude Trichet would very happily have people killed, pervert every course of justice, and misreport every banking statistic – if he thought it could get him off the hook. Because he knows – as Merkel knows, and all the heads of all the major banks know, and Willy Hague knows because he is really Brains without the strings – that a major eurozone failure would plunge us all into the abyss.

These are the factors that have convinced Hillary Clinton to confront Obama with the reality of the EU as a nihilistic catalyst. They may even explain why The Cool Dude looked distinctly ill at ease while meeting the great unwashed two days ago.

In fact, a gradual and frank leaking of the situation would’ve been infinitely preferable. But being a banker, it is not in Trichet’s nature to manage expectations like that. In my profession, I stuck to one principle through thick and thin: no last-minute surprises for the client, because when the crisis has passed, he will assuredly fire you at the first opportunity. The ECB chief’s instinct is to cover up, pretend, put off and lie. To con, to spin, to let off smoke bombs, and to maximise the use of reflective surfaces.

As Pimco’s Muhammed El-Arian remarked yesterday, “Such a policy cannot be sustained”.

For polite understatement, that one is hard to beat.