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Trading Lessons

QE And CDS Are Weapons Of Mass Deception

Interest-Rates / Quantitative Easing Jun 24, 2014 - 03:48 PM GMT

By: Raul_I_Meijer

Interest-Rates

The age of financial innnovations found such an exalted high priest in Alan Greenspan that in his days as Fed governor he couldn’t stop talking about the dangers of regulating them, even though that was in his job description, and even though he had far too little detailed knowledge of them. His sidekicks over at the Treasury, Bob Rubin and Larry Summers, made sure their friends at Citi and JPMorgan had nothing to fear from the US government in this regard either, just as Glass-Steagall was repealed.


That’s how we got see the spread of a zillion kinds of securities and derivatives, and that’s why the vast majority of them were lauded as being highly beneficial for the economy, and therefore for all of us. Many of these instruments were and are being touted as insurance policies for the finance industry, in the same way farmers had been able to buy crop insurance since the days of old.

But that’s at best only part of the story. For instance, whether the hugely popular credit default swap may or may not initially have been ‘invented’ to serve as an insurance tool in the financial markets, is hardly interesting or relevant. What’s more important is that it very rapidly became, while it got cheaper as its popularity soared, a way for corporations and financial institutions to hide, and get rid of, their debts and liabilities.

In somewhat simplified terms, once you can claim that you have insurance against potential losses on your assets, you no longer have to carry reserves against the risk of these losses. At the height of the crisis this made many a balance sheet look a whole lot better than it really was .

And that situation continues to this day. Even if conditions have changed, and been adapted. A lot of the riskiest paper has been bought up by central banks since 2008. That buying spree, too, continues. This has lowered the risks – of credit defaults – substantially, at least for now and at least in the eyes of the industry.

And since the central banks have not only taken on a lot of the worst risk, but also made sure stock markets have been propped up and interest rates kept low, and moreover are today even increasingly purchasing stocks and bonds themselves, asset prices are skyhigh and risk assessments are ultra low. Stocks, bonds, securities have all been bought up with central banks’ thin air money in such quantities that central banks have become the markets instead of regulating them.

The reality of central bank stimulus measures, such as QE 1,2,3,x, is as different from perception as that of credit default swaps. And their aim and function are very similar: to hide from sight the risks that exist inside the financial system. Both for CDS and for QE this so far works like a charm. The dark side is, however, that if no-one knows the real value of any assets anymore, they have no way of gauging the risks involved either.

Central banks’ policies today are geared towards one goal, and one only: that no-one will find out what anything at all is really worth. The very fact that the Chinese, Japanese, European and American central banks engage in this behavior in the first place should raise flaring red flag suspicions about actual values.

Both QE and CDS – along with many other “securities” – are weapons of mass deception. We live in a global economic system that has been intentionally deprived of the means to find out what assets are worth, and that’s not a coincidence. The system couldn’t survive in its present state if there were price discovery; real values and losses may have been hidden, but they haven’t gone away.

Values may have been artificially inflated, and losses artificially limited, but nothing of the underlying reality has changed. Quite the contrary: decisions are being made on a daily basis by governments, companies and individuals, based on the false assumptions about values, risks and losses that result from financial innovations specifically designed to produce an artificial portrait of where we stand.

The consequence is that no-one truly knows where they stand anymore, but almost everyone thinks they do, thinks that we’re in a rough patch, but otherwise doing fine, that we’re growing, just at a temporarily slow pace. While in reality, we haven’t grown in years, and have very little chance of doing so in the next decade, at least.

We don’t like the idea that everything we see that looks and feels good in this regard needs to be borrowed from somebody’s future. So we ignore it. We’re a sad lot, really, we can’t face our own truth. We’d rather sell our souls for a lie that makes us feel better for a fleeting moment. We all like to think our homes, our pensions, our investments are worth more than they are.

QE, CDS et al are “innovations” designed to take advantage of that.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Raul Ilargi Meijer Archive

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