Predictably, the banking crisis is morphing into a sovereign debt crisis.  Greece is for openers.  If the history of banking crises is anything to go by, inflation will be the final hotspot. Why should we be surprised? Modern history is littered with bones of Government's defaulting or rescheduling debt.  Ireland doesn't feature in the list but that would change if the burn-the-bondholders brigade got their way with Anglo Irish bank. For good or ill the Government chose to guarantee corporate bondholders. Strike it down and we enter uncomfortable company with some high profile default risks;

• Greece has defaulted or rescheduled five times since its independence in 1829 and has been in default for a quarter of its history.
• Spain's record is 13 times having spent 23 years in default or rescheduling.
• Portugal's record is 6 times.

Look around the world and few economies were spared defaulting especially if you consider ramping up inflation to cut the real cost of how much you owe lenders, as a de facto default. By 1947, due to WW2 and The Great Depression, countries responsible for 40% of global GDP were in default or rescheduling. Even the USA doesn't have a clean history having let inflation hit 200% in one of its early years and having reneged on repaying debt in gold - backed dollars in 1933. Neither is Iceland's desperate EU membership bid a new story. Newfoundland, with a similar population to Icelands, was forced by the British Government to relinquish 78 years of direct democracy over its debts and join a federation with Canada in the 1930's.

Each time, at the top of the debt bubble, the conceit that this time it's different blinds economists, governments and central bankers to the truth.
Before the latest crisis leading players like Alan Greenspan and Wall Street wizards of high finance reckoned that the massive debts growing in the US economy could be dissipated and controlled by spreading the risks wider through the global financial system, much like reinsurance does. But all the fancy derivative alchemy did was to blow the bubble higher and spread the muck wider when subprime debt burst. So what can we learn from past banking bursts;

• Property on average falls 35% and stays down for 6 years. But there are exceptions; Finland and Hong Kong experienced 50% to 60% falls. Japan's property stayed down for 17 years!
• Unemployment rises for 5 years and typically by 7%. But spare a thought for The Great Depression when unemployment rose nearly 17% across 15 countries
• Real per capita GDP, a key measure of wealth, contracts -9.3% and takes nearly five years to recover lost ground.
• Government borrowings rise a staggering 86% of GDP, not from banking bailouts but from the massive losses in tax revenues.

So what about now? In the past shares have fallen 56% and taken 3.5 years to recover. But this time while shares fell a little bit more they've recovered two thirds of their losses in just nine months. Markets read a sustained, though weak recovery. But is it really to be different this time?
Hell I wish I knew. Tell you what though, if we avoid a second leg down we'll definitely hit high inflation. The alternative is a perfect landing.
I don't do perfect landings, particularly when they're touted by the same crowd that misread the great credit bubble of the noughties.

PS   All bets are off with Northern Rock Bank on May 24th when the 100% UK government guarantee is removed. The safest bridge to retreat over in the unlikely event of a second bank run will be AAA rated Rabobank.