Another sign of the end of this financial system.

It's a long standing prediction of mine that when the system begins to melt down we will see that things that used to work just fine in the system stop working.  By "used to work just fine" I mean that there are certain economic truisms which people have taken for granted for a long, long time will simply stop working.  The reason for this is that bad assumptions were being made or that the fat tail event was never considered at all.  People said "x has been related to y for so long now that they must go hand in hand".  It sounded so good for so long that people put processes and systems in place to handle them.

But those relationships, we will soon find, are not always true and in fact most will break down when the leverage gets too high which is why the derivatives trade will eventually blow sky high.  In essence, the amount of leverage used distorts the very fabric of economics in the same way as a black hole distorts the fabric of space time.   One of the first signs that this sort of thing is happening is when trusted machines have to be taken off line by humans who are suddenly afraid, after so many years of trusting the machines, that something is very different now - something that could break them in an eye blink.

And it is from that angle that I bring this article which discusses how the supposedly deeply liquid treasury market is becoming thinly traded on a relative basis because primary dealers are starting to worry about the music being shut off without an open chair being available for themselves. 

Remember what Citi's Ponzi Prince (Chuck Prince) said just before the meltdown began in 2007:
 
"“At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way. I don’t think we’re at that point.”

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”

So these guys know it is a Ponzi scheme and that when the final collapse occurs it will send us back into the economic stone ages (where the barbarous relics of gold and silver were still used as money).  Pulling the plug on the machine in the article tells us that the con men are getting nervous.

The whole global economic system is one big LTCM now folks. It's all leverage and little capital.  The music plays as long as the liquidity is flowing but after it the music stops all the big players will stop dancing and run for the chairs at the same time.  The music is the long term assumed truisms.  For example, the long standing relationships between interest rates and inflation, etc.  But the key assumption here is lack of fear about the safety of the system.  If you add the element of fear, such as fear of being stuck with a bunch of treasuries who interest rate (and therefore market value) is hopping all over the place like a Mexican jumping bean (AKA volatility), then the old truisms can easily stop working. The market's famed liquidity can dry up in a heart beat if there is uncertainty.  Since uncertainty equals fear in the markets, we can measure the perceived uncertainty using the VIX.

Enter the not so small matter of $700 trillion of notional value of derivatives (Buffett called them weapons of financial mass destruction).  The story we are told is that we need not worry because they will mainly cancel each other out.  One guy buys insurance in the form of a derivative from another company who promises to make the buyer whole if we see higher interest rates.  He is able to do this because he has made another deal with another company to be made whole in case we get inflation.  Each of these transactions carries a premium associated with it, just like insurance.  And so at the end of the day, the vast majority of our economy is really just the insurance business where everyone is promising un-keepable promises to the next guy in order to get the fee for the transaction today.

So we now have all these insurance policies running around which are being administered by people who know nothing about risk management.  Oh, they think they know just like LTCM thought they knew.  But it is clear from the exponentially rising debt that nobody is taking the extremely unlikely events into proper consideration.  These are the so called fat tail events; the ones nobody could see coming even though the exponential rise of debt made it obvious that they had to happen at some time.

Sooner or later Chuck Prince will be correct.  Some event will disrupt the liquidity of the treasury market and rates will begin to skyrocket even though we have deflation.  So the insurance policies that were supposed to cancel each other out do not do that.  Instead, they become additive.

Just remember after it all collapses, and I mean really collapses far worse than 2007-2009,  that many people saw it coming and that we know the real reason why it not only did eventually arrive but that it had to at some point do so and that is the use of a fraudulent money supply consisting of fiat currency and fractional reserve lending. Without this scam ridden con game of a money supply there is no possible way we could be in this mess.  Remember this as the boob tube tries to explain what happened to the common man.  Remember this as they try to tell us that with just a bit more oversight and regulation it could all have been avoided.  I'm telling you that no Ponzi ever lasted forever and that they tend to peak and then implode with exponential speed.  I'm telling you that, one started, a Ponzi only gets worse and worse the longer it is allowed to run.  It never gets better.  There is no amount of guidance or money smarts that can avoid the crash.

No, it will not be different this time.  Keep an eye on men taking their trusted systems offline.  Such events are telling IMO.