Perfect moral hazard – Privatizing gains, externalizing costs

“All the world’s a stage, and all the men and women merely players.”

What version of capitalism places zombie financial institutions on life-support using super cheap liquidity pumped into the zombies’ veins via central banks?


The Long and the Short of it

So, the major banks, central banks, and government haven’t been prudent. Hell, they haven’t even been incompetent. In my opinion, they have been about as responsible as a group of children guarding a room full of other peoples candy. The oversight being the children’s parents, whom only bother to look in periodically, and then only occasionally fining each child 5 pieces of candy for every time they were caught misappropriating the candy, just so they appear to be doing their job.

The banking system a few years ago

When the banks ran out of candy and could no longer hide it, the government burst into action to keep these failed institutions alive by filling them back up with candy. The great bail out of 2008. The government simply used the candy taken from the people, to keep specific candy shops in business. They were just to big to let fail. So it seemed like business as usual. All was well again in the land of cognitive dissonance. Until… Cyprus ran out of candy. Out of nowhere, candy vanished from Cyprus, and their major banks were looking likely to fall. BitCandy rose in value suddenly, and candy stores went on holiday. People were disenchanted once again, but this time it was different. The concept of candy haircuts was posited in the media for all. It would only be about 1 or 2%, the Cypriots were told. Only the final figure was officially 47.5%. although in reality it may even be more. Depositors in Laiki bank and the Bank of Cyprus have been taken for a ride on the chicanery train. That was the time for the Cypriots to disembark the system, take control and purge their system of this toxic candy, and repopulate their government. I guess they shrugged it off. As, the haircut was only for uninsured deposits over 100,000. Nobody went hungry this time.


The banking system today, circa 2014

Today it’s better than ever. Citizens of some European countries have become enlightened, and forced their respective governments to concede that their golden chocolate bars, that they had faithfully entrusted with the United States of America and Great Britain, had undergone rehypothecation, and been sold to someone else, and someone else, and someone else again. The game of musical chairs must eventually stop. Ten players and one chair. Who will be left with the golden chocolate bars, who will be left with IOU’s? Golden chocolate in all shapes and forms, is being sucked into Switzerland for refining, Eastward bound. The Chinese have a love affair for golden chocolate, and like to put it into deep storage. The Indians prefer to wear it on their body for adornment. Europeans and North Americans prefer to have their gold rehypothecated and sold, and vanished, and gone to someone else. I would have to say, with all the economic uncertainty, and endemic financial manipulation, I would be getting my hands on these golden chocolate bars, and as many as I could carry. Not just for capital gain and the short term, but for the purpose of owning a true and tested form of money. If the supply of gold doubled each year, it would eventually become as common as sand on a beach, and nobody would be interested in it. Apart from its metallurgic qualities, if nobody were to accept it as a form of payment, it may as well stay underground. But that is not the case. In fact, Asia seems more than happy to accrue physical, and the price is still low. Why?


Deleveraging of the toxic debt candy

It is no secret that major Western banks are leveraged to the eyeballs, are insolvent, and along with central banks are inflating financial assets and buying securities, keeping the game of musical chairs going for the top 10% or so who own stocks and these assets. The “foodstamp” zombies are growing concurrently too. The wealth divide is wider than ever. So when the music does stop, as it inevitably does, what does the picture look like? For the poor huddled masses, the picture looks fairly similar. For the working poor, they will join the foodstamp zombies. I’d say that most will be in for shock. Especially the rich. The 1% or so will probably be fine. They will have their wealth safely tucked away from inflated and dangerous paper assets. Gold, land, fine art. Traditional avenues of wealth preservation. Probably they will expand their wealth, as they buy up assets and land at rock bottom prices, when the rest of the population is selling and heavily disenchanted. Oh well. Better luck next time.


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