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As the risk distinctions increase, the interest rate risk premiums diverge.

It is this that is termed ‘recovery’, but rather than a recovery, it is a form of double jeopardy — an intensification of previous failed strategies in the hope that a different outcome will result. Now that financial crisis conditions are developing again, policies are being implemented which amount to an even greater intensification of the old strategy.

Interest rate divergences create self-fulfilling prophecies as to relative default risk, against a backdrop of fear-driven high volatility.

Many risk distinctions can be made — government versus private debt, long versus short term, economic center versus emerging markets, inside the European single currency versus outside, the European center versus the troubled periphery, high grade bonds versus junk bonds etc.

The continued existence of risk becomes increasingly evident, and the realisation that that risk could be catastrophic begins to dawn.

Natural limits for both borrowing and lending threaten the capacity to prolong the credit boom any further, meaning that even if central authorities are prepared to pay almost any price to do so, it ceases to be possible to kick the can further down the road.

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