Lessons From The Financial World

If Debt Turned Into A Butterfly All Would Be Good!

Central Banks have been expanding the money supply and had their foot to the floor yet economies across the world are not even close to escape velocity. Lessons from the "Financial World" are being doled out rather rapidly these days and it is best to pay close attention. They include new terms like bank bail-ins where you can be given a very expensive "haircut" to "claw-backs" a term referring to how a deal isn't over even after its over. And who among us has not recoiled in amazement to discover the so called free market in China that did not rebound after several massive attempts by the Chinese government to resuscitate it. The last time the market rebounded it was after the government threatened to arrest and imprison short sellers. 
 
Our massive debt load is not receding or going away it is merely being transferred to the public sector where those in charge of such things feel it will be more benign. The most recent solution to Greece's debt crisis stands as a monument to the concept that if creative financing isn't creative then what is it? This question makes sense when positioned with other such deep philosophical questions like, how much wood would a woodchuck chuck if a woodchuck could chuck wood? Returning to the issue of creative financing in many ways it has become mind-boggling crazy. Creative financing can be so out there that it is hard to get your head around and makes absolutely no sense. At times it falls into the same logic of the great movie line from The Field Of Dreams "build it and they will come" a logic soundly rooted in faith and little else. The problem with the build it and they will come is that often they don't come. Those who have made such an investment often come to regret it.

We Have Transferred Dept To The Public Sector

To anyone with a pulse it should be perfectly clear that nothing normal existed in the recent stock market panic sell-off in China and even less in the methods use by the Chinese government to finally halt its fall. The same should be said about the constant market gyrations taking place. On almost a daily basis Greece is pointed to as being the driving force lurking behind market volatility. In all honesty anyone with half a brain knows Greece is in default and has no way to repay its massive debt. The only question remaining is how the issue of their debt will be resolved. The Greek soap opera continues and even calls for "humanitarian aid" are thrown about as the economy of Greece grinds to a halt.

All this is ratcheting up the cost of the sad game we know as debt restructuring, meaning if they don't deny responsibility for the mess in Greece it is certain Europeans will have to pony up even more cash to keep the lights on in Greece. Until now the countries of the Euro-zone that hold this debt have been resistant to acknowledging to the world the giant scam that they have enabled. While those in charge appear undaunted by what is occurring the fact is by a series of off-book and backdoor transactions they have transferred this loss from the banks onto the shoulders of the people. All this has been done through actions they can only defend by talking in terms of the "greater good" or to by conjuring up images of a horrible financial Armageddon that might of occurred had they not taken this course. 

Thank God This Chart Ends In 2013!

It appears the world has past the point of no-return when it comes to our experiment in monetary manipulation. Modern Monetary Theory (MMT)  was to be our salvation and a tool to even out economic cycles but instead it has morphed into a massive dept machine that drives the economy forward. We may soon rue the day we started down this path for where it leads to a very bleak place. Those in charge of the economy have made the mistake of thinking markets are like clay that can be molded, this is in conflict with the law of economics where in reality markets are like water and will always seek and find their own level no matter who or what tries to control them.

One lesson should be clear by now is that no limits exist to the length those in charge will go to maintain the appearance of stability. Sadly, debt does matter and we may soon run out of places to hide it. A very strong case could be make that a plethora of new tools added the the central banks' tool boxes over the last decade have masked and distorted the economic landscape. This can be seen in the explosion of derivatives, more debt leveraging, and in the growing carry trade. It is a fact that unproven tools can produce damaging results when not prudently applied still efforts to "extend and pretend" seem almost unlimited. When we see how quickly those in charge are ready to give bank depositors haircuts we should not be reassured, instead we should be frightened and see this as a glimpse of how we might be treated when they turn their sights on us.

The problem of dept is not limited just to western countries. In China debt is also a  problem. “If stocks remain above their fundamental value, then all the [Chinese government] is doing with these kinds of interventions is trapping capital rather than letting investors reallocate it to a higher use,” says Eugene White, an economist at Rutgers University who studies the history of financial booms and busts. Maybe the most important lesson to take away from all of this is that we cannot remain in this no man's land forever. “When a bubble pops, it’s leverage that almost always proves so corrosive and destabilizing on the way down,” says Lawrence White, professor at New York University’s Stern School of Business who specializes in financial regulation. Both these men reinforce my point that we may soon move from the realm of insane denial rounding the corner to find we have arrived at an area of utterly obvious crisis.


Footnote; As always your comments are encouraged and please check out the archives to see if other articles exist that you might find of interest.  Below is a post delving into how we often deal with debt and it reminds us that we should be cautious in placing our money out on loan.
 http://brucewilds.blogspot.com/2014/05/debt-mirage-always-moving-into-distance.html