14 years after LTCM, we know that the previous quarter century was just child’s play. The central banks have to pay a lot more for optimism today. Loans aren’t enough; now they must give the money away. Printing presses are running flat out…and the developed world monetary base is almost three times higher than it was at the start of 2008…
The progression from the $1.5 billion Chrysler rescue to the current multi-trillion dollar worldwide financial support operations seems to parallel the march from the first US forestry service attempts to limit forest fires about a century ago to the far more sophisticated efforts possible today. Although the forestry service is successful limiting small fires, the longer they suppress them, the higher the probability of a highly disastrous, totally uncontrollable conflagration. Studies have shown that the onset of that catastrophe is almost totally unpredictable.
By suppressing small fires, the forests approach an unstable state where the dead wood, resulting from the natural cycle of birth and death in the wild, is piled high, ready to explode into flames if the conditions are right. The central banks and other governmental authorities have piled the money so high that bubbles are popping up everywhere.
Four years ago we asked what would happen if the deleveraging process then underway had much further to go. Now we know part of the answer. The Western world’s governments printed money, and China didn’t deleverage at all. It decided to massively increase leverage by $1.7 trillion in real estate loans that created empty cities. And nothing at all has been done to bring transparency and order to the credit default swap world, now estimated at $32 trillion. Hard to imagine this ending without serious inflation, whatever the merits of the forest fire metaphor.