"The Odds Of A ‘Spark’ Setting Off A Global Economic Conflagration Are Very High"
By Tyler Durden
Submitted by via InternationalMan.com,
In 1871, a large portion of the city of Chicago burned to the ground. The Chicago Tribune attributed the fire to a cow owned by a Mrs. O’Leary. The Tribune stated that the cow kicked over a lantern as she was being milked, burning the barn and much of Chicago.
Whether the story is accurate is of little concern. (Somebody always has to be found to take the blame for catastrophe.) Whatever started the barn fire in Mrs. O’Leary’s neighbourhood, a seemingly minor event resulted in a major conflagration.
And so it is with economic events. Bankers are expected to maintain a fractional reserve of 3–10%, depending on the level and type of liabilities, but, not surprisingly, they often drop below the official level, especially in times of economic difficulties. Bank managers assume that they can always increase the reserve when good times return. The trouble is they’re at their most exposed at a time when a substantial reserve is most critical.
But why would bankers take such a risk? Aren’t they fearful that they’ll get caught out if a crisis occurs?
Not really. Their assumption is very often that their indiscretion exists in isolation. They assume that if they alone cheat the system a bit, they can always catch up later. For whatever reason, it rarely occurs to them that, in a struggling economy, each of their associates in the industry is also cheating the system. Since each one keeps his activities under wraps, it doesn’t become apparent that the whole system is a house of cards until a black swan jolts the system, which, due to its overall instability, self-destructs.
Similarly, in shaky economic times, there’s quite a bit of fiddling that’s done in the stock market. As the public begins to lose their confidence in the system, they offers their shares for sale. In order to cover up the loss of confidence, these shares may be bought up by central banks, governments, and/or the corporations themselves – buying back their own shares.
Of course, this is risky, as crashes are caused by loss of confidence. Papering over that loss of confidence by papering over the cause of the problem only means that when the crash comes, it will be worse than if it had been allowed to collapse earlier.
Pensions tend to be heavily invested in the markets, which tends to put them at risk as well. The foremost mutual fund in the US is invested in 507 companies – commodities, energy, financials, industrials, IT, etc. To be sure, these will not suffer equally in a crash, but all will be affected – some severely.
If an investor gets skittish about being tied so heavily to banks and the stock market, he might decide to buy some precious metals, as he’s hearing it bandied about that precious metals provide a hedge against stocks. But, knowing little about metals, he’s likely to be “prudent” and call his broker rather than visit the coin shop to buy some physical gold. Most likely, his …read more
Source: "The Odds Of A ‘Spark’ Setting Off A Global Economic Conflagration Are Very High"
