Apr 042012
 April 4, 2012  Posted by at 2:21 pm Finance

Nature is chock full of inherently non-linear systems that do not follow predictable or proportional paths, yet human nature seems unable to escape a linear mindset. Nowhere is this more evident than in the financial markets. Every time a policy action is followed by a “favorable” response in the markets, the mainstream chorus sets in to sing the praises of said policy. Many of the politicians, pundits and academics assume that the policies have induced a sustainable turning point simply because the markets are all moving in one direction for the time being.

On the other hand, you have sites like TAE and others who constantly remind that the pressure will not slowly and uniformly build up throughout the system, because we understand its non-linear progression. The ECB’s LTRO took the pressure off of the Euro peripheral bond markets (mostly Italy’s), as well as bank funding markets, and the Greek PSI relieved the possibility of an imminent “disorderly default” in the region, but they did not resolve any of the underlying issues in Europe. The pressures were merely masked and re-distributed to other parts of the system.

Within months of LTRO and weeks of the PSI, the spectre of financial contagion is once again haunting the Euro area – this time with all eyes trained on Spain. Today’s Spanish auction of 3-8 year bonds, just outside of the LTRO’s 3-year cheap liquidity range, was a major disappointment for the pundits, since it only placed a little over 70% over the amount targeted and at significantly elevated rates of interest from previous auctions. Is anyone other than the pundits surprised that this has happened? One day they are all yammering on about Greece, and the next day about Italy, and the next about Greece again, and then about Portugal and Spain. That’s just non-linearity for you.



Another thing weighing on the markets is the fact that it is near impossible for the Eurozone to avoid a deep recession this year, as reflected in the graph of PMI and GDP data above, and therefore Europe’s structural solvency issues are not going to simply disappear. Of course, we didn’t need to see this correlation graph to know that the sharp moves upward in 2009-10 data were entirely unsustainable. Finally, the liquidity addicts are disappointed that the Fed has refused to promise them another round of QE, despite constant rumors to the contrary over the past few weeks ahead of every Fed meeting and release of minutes.

They are realizing that with every passing day that the cheap liquidity does not arrive in the post-Greek default environment, the effects of such liquidity on the global financial system as a whole are severely diminished (or Why Liquidity is No Longer Enough). Today is just one of those days in which it dawns on big money investors, if only for a few moments, that all of those previous market rallies were merely a symptom of a non-linear system that is haphazardly marching through the stages of its collapse.

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    Nature is chock full of inherently non-linear systems that do not follow predictable or proportional paths, yet human nature seems unable to escape a
    [See the full post at: Non-Linear Crises]


    For the last 30 years, growth was being generated by borrowing.
    The borrowed money did not exist. It was created, (heheh, God Work)

    Can borrowing, (creation of money), continue without paying back the lender with interest?

    Who or what organization is capable to continue lending without getting their loans paid back?

    How long can loans be given out with only a token cash flow coming back to the lenders?

    At some point in time, there has to be loan forgiveness and a rebalancing of the books. (There has to be a recognition that bankers are false gods)
    The participants of all this fraudulent accounting are well aware of what is happening and must continue the pretend game.

    There is no other game in town.


    My bank seems to be moving toward increased fees on everything. The money it loans is ginned up out of thin air, then it charges fees out the wazoo for each transaction that occurs in the larger economy. Velocity of money yields handsome returns. Maybe this softens the blow of late loan payments.


    Part of what keeps things going is the simple flow of money. Kind of like a animal in a long death the things get extended with this lumbering flow.

    That is what the whole debt thing is about. Companies offer their own financing to sell there own products. Many auto manufactures do this and by it can keep themselves from bankruptcy for a time.

    But it is a move of desperation. Don’t pay now we will finance you way into the future and in fact we will give you money now to purchase our fine product.

    In the dot com era the message was don’t look at the bottom line, forget about profit and just worry gaining market share at any cost. This flawed logic works for a time.

    Now we say don’t worry about debt, in fact worry about not taking on enough debt. Throw trillions in of electronic money. This will increase the movement of money and keep this sick beast breathing. Again flawed logic.

    My feeling is this will all end badly.

    Golden Oxen

    I had thought the Fed said QE 3 was on the back burner UNLESS the economy weakened again. It was the only truthful comment they made IMHO.


    Golden Oxen post=1902 wrote: I had thought the Fed said QE 3 was on the back burner UNLESS the economy weakened again. It was the only truthful comment they made IMHO.

    They’ve been saying something to that effect for about a year now. They never say QE will certainly come back if the economy weakens, but rather that it remains a viable policy tool. What’s the alternative?

    “QE3 is off the table no matter what happens to the economy or markets. Sorry, folks, better luck next time!”

    Then watch the markets melt down?

    Everyone knows that economic health is reflected by stock market valuations, because that’s what the propaganda has made us believe. So now we can’t get QE until the markets crash, but the markets refuse to crash as long as QE is still possible… any day now. There are, of course, other factors that have made QE3 unlikely in the first half of this year, as I’ve explained many times in my posts. The elections are one factor, but that’s more of an issue when the general campaigns get fully underway. Another important factor is that QE has simply lost a lot of effectiveness in the eyes of the banking elite, so they must wait longer and longer before they can get significant marginal benefits from turning on the liquidity faucet again.

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