When the Bond Bubble Bursts ~ The Risk Averse Alert

Friday, February 01, 2013

When the Bond Bubble Bursts

So, where is all the volume of trading occurring these days? It certainly isn't in stocks.

Rather volume is sustaining debt markets. Issuance continues to sizzle all across the spectrum. Likewise, offerings more or less are being uniformly bid up, as this indeed is necessary if the banking system is to remain shielded from catastrophic collapse. Lender of last resort largess at least is accomplishing this much.

Yet can this continue forever? Obviously, it cannot. However, it must. If the banking system's collapse is to be indefinitely deferred, debt issuance must continue expanding. Otherwise the banking system is at grave risk of cratering into the abyss. It is that simple.

Given a profoundly imbalanced, securities-based financial system leveraging to the teeth an ever contracting diversity of wealth producing capacity—be it in the physical or the financial economy—indebtedness positively must increase if the banking system is to maintain appearances of solvency. This means whatever need be employed to sustain the appearance of viability of the broad mass of financial claims outstanding, we can expect every effort will be made to bring it to fruition.

Ultimately, the bottom line motivation behind Britain's E.U. extortion minimally serves this end.

Today's circumstance is vastly different—far more precarious—than anything ever experienced in modern history since the Industrial Revolution. One way or another leverage must increase. Inasmuch as expanding outstanding debt increases leverage, so too does marginalizing labor to the effect of increasing the pool of virtual slaves available for extracting wealth from production still remaining intact. Such is how an imperial economic system operates.

The age of deindustrialization in what were once first rate, state-of-the-art economies whose production was offshored—globalization—for a time could be made to appear more or less indefinitely viable. Systemically threatening convulsions occurring along the way—the first might be traced back to the Latin American debt crisis of the early 1980s—rather than being regarded unintended consequences, instead should be seen features—facets—of an enslavement imperative that ever is imperialism's offspring. Convulsions must occur in the imperial order of things, as they will continue to occur. There should be no mistaking this. Systemically threatening discontinuities are the necessary, preordained consequence of an economic system whose operation at every level serves to marginalize assets of every kind.

This is the world we live in, friend. This the United States in fact was formed to reject, counterposing a system operating from a perspective of abundance presenting opportunity to increase the underlying value of assets of every kind at every level of economic (and social) functioning. This is why Glass-Steagall, a Hamiltonian national bank and state-of-the-art investment in physical economy urgently are required—must come to be immediately—if we are to avoid the worst of consequences mankind is given to suffer in moments of weakness submitting to circumstance effectively subduing our individual and collective creative capacities and the spirit that burns to engage these.

Stepping off my soapbox and reentering the world where suckers believe in "free markets" (there is no such thing, nor could there ever be) and where money is the measure lending meaning to everything, the manner in which money's availability today is expanding via emboldened debt markets deserves further comment relevant to the fate of financial assets at the bottom rung of the capital structure—stocks.

Let me ask you this. If someone in 2005-2006 had suggested to you real estate finance was a building bubble eventually destined to pop, following which capital would move all the more aggressively into stocks, would you have believed it? Well, this is exactly how we should view circumstance regarding the bond market. When that bubble pops, every asset, physical and financial, will be compromised.

Let's not suppose the end of the world necessarily will be the consequence. Yes, every asset, physical and financial, will be compromised. The very most liquid, especially, will be crushed. So, when the bond bubble bursts, stocks will be beaten like a dirty rug. Anyone thinking otherwise obviously isn't thinking.

Yet like I said at the start, debt issuance must continue expanding, otherwise the banking system will collapse. Then it will be hello hyperinflation impossible to disguise. Hello blushing Paul Volcker and long bond rates making his 21% a tame, fond memory. Hello scarcity in accelerated shutdown of the physical economy. Hello unimaginable destitution and want. Hello Dow 36,000? Sure, for whatever this will be worth in a Weimar redux.

I'll tell you this much. If the bond bubble were not doomed to pop, NASDAQ would be flying, its cumulative advance-decline line would already have ended its death spiral and joined the NYSE's ascent to the heavens, the daily volume of shares exchanged would be relentlessly expanding with the market's continued levitation, Europe would be recovering, Japan would not be aggressively debasing its currency, and Britain would not so plainly be venturing to push the globe into chaotic convulsion, as it must if its authority as the world's most onerous imperial scourge is to be sustained and, indeed, expanded.

Unprecedented monetarist machinations such as have facilitated an overtime extension of a thirty year bond bull market, otherwise exposed a dangerously seductive means of sustaining what has become a gargantuan mountain of mis-priced risk, simply cannot be separated from physical reality in which they are occurring. Just as expansion of real estate mortgage debt and related derivative securities could not forever be perpetuated without a systemically threatening convulsion intervening, so too is the fate of lender of last resort largess already sealed.

It's not a matter of if the bond bubble bursts. It's only a matter of when. Britain's E.U. ultimatum suggests the moment of truth very likely could be at hand.

Word on the Street
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