DOW PLUNGES 900 POINTS: As The Global Financial System Begins To Break The Collapse Will Be Sudden
On the heels of the Dow plunging over 900 points at one point during today’s trading session, as the global financial system begins to break the collapse will be sudden.
Rising Rates Lead To Financial Accidents
December 15 (King World News) – Alasdair Macleod, head of research at Goldmoney: A recent Bank for International Settlements paper warning of unappreciated risks in foreign exchange markets echoes my earlier warning in an article for Goldmoney published over a month ago describing derivative risks in FX markets.
In this article I also show evidence that banks in both the US and Eurozone are reducing the deposit side of their balance sheets by turning away big deposits which are ending up in central bank reverse repos, parking unwanted liquidity out of public circulation. The great unwind is well under way.
Credit contraction is not only driving a bear market in financial assets, but the exposure to malinvestments by rising interest rates is having negative consequences for the non-financial economy as well. Private equity, which has thrived on cheap finance used to leverage targeted businesses, is showing signs of unwinding with two major Blackrock funds suspending redemptions.
As we approach the season for year-end window dressing, we must hope that the volatility in thin markets that often accompanies it does not destabilise global financial markets.
Inflation and stagnation
Make no mistake: interest rates have bottomed at the zero bound and can go no lower. The forty-year trend of declining interest rates has ended, with an initial rally, which six weeks ago had halved the value of the 30-year US Treasury bond. The suddenness of this change probably needed a pause, and that is what we have today. Since October, there has been a spectacular recovery in bond prices with this UST bond yield dropping ¾% to 3.5%.
Fears of price inflation have been replaced in large measure by fear of recession. Having dismissed monetarism, bizarrely for a Keynesian led establishment analysts and commentators are now frequently citing the slowing of monetary growth as evidence of a looming recession. Perhaps this means that the failure of their economic models has them grasping at straws, rather than being evidence of a conversion to monetarism. But what is definitely not in the Keynesians’ playbook is a combination of inflation and recession, commonly attributed to an unexplained phenomenon of stagflation.
A moment’s thought explains the coincidence of the two. Inflation of total credit (both by central banks and commercial banks) transfers wealth from private sector actors to the State, its licenced banks, and their favoured borrowers. It acts as a suffocating hidden tax on economic progress, impoverishing ordinary people, and through their desire to protect themselves from credit debasement, driving otherwise productive capital resources into “safe havens”, such as physical property and financial speculation. There comes a point where the stimulative effects of credit expansion, which is a device to trick markets into thinking that things are better than they really are, becomes outright destructive.
If it was otherwise, currency debasement would work even history plainly shows it to be a destructive, failed policy. And in extremis, nations as diverse as 1920s Germany and today’s Zimbabwe would have been roaring successes from an economic point of view with their nominal GDP soaring off the scale. By way of contrast, post-WW2 Germany and Japan adopted monetary policies which led to strong currencies, yet they still outperformed the socks off the inflationary Anglo-Saxons…
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