Guarantors of Collapse ~ The Risk Averse Alert

Thursday, December 01, 2011

Guarantors of Collapse

Leverage hates volatility when there's too much of either. That's why a financial system as heavily leveraged as ours today suffering profound volatility in securities at its apex surely stands at grave risk of chaotic dislocation.

There should be no disputing this vulnerability presently. Wild gyrations in the market value of euro-zone sovereign debt provide fair warning that, a crush for capital likely soon will develop, and liquid markets hit with a vengeance.

The plain truth right now is central bankers are outmatched. Indeed, the only thing remaining these bankrupt enterprises can do is hasten collapse. Learning the Fed yesterday announced that, "were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop ... and is prepared to use these tools as needed to support financial stability" — in fact, no new intention being indicated here — one is left to wonder just how volatile must markets for sovereign debt become before the Fed's excess reserve of cheap talk becomes a wall of hyperinflationary liquidity? Truth is the Fed is dead, and has been for a long time. Could any central bank decisively act without blowing out the physical economy, then judging by the Fed's language, they would. Trouble is they can't. Therefore, they're all dead.

Thus, too, is the measure of insanity and cowardice dominating today's thinking, both within official policy making circles and among casual observers, revealed in calls for the ECB to monetize debt crushing the European banking system. For the lack of due diligence exercised by the Fed for decades — coaxed by a Bank of England operating in a regime where zero due diligence is official policy — the ECB is supposed to step up and paper over a trash heap at whose foundation exists securities made on Wall Street and hedged offshore in the UK's unregulated, neo-colonial territories? On what planet? Just how weak is the analytical position of those hounding the ECB, claiming Europe has it within its means to mitigate deteriorating credit conditions, is plain. In taking this stance a schism waits in the wings. The drumbeat only grows louder for sovereign/municipal default, which outcome is likely to cascade into a chain reaction collapse of "assets" of every sort.

As things stand right now, we could see the bottom fall out before year end. At best, collapse might be delayed until January. Have no doubt, chaos is banging at the door and looks sure to bust it down. It's only a matter of time now (with the fuse burning short at the present moment).

Fast Money
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