I have been following this saga for three years. I had anticipated big problems a couple of years ago, but they didn't manifest as optimism does tend to defy logic for some time.
When I first realized the size of the Derivatives market, I thought, wow, that is multiples of the worlds GDP - if this whole mess falls over, we are screwed. Now how can I make money shorting the market....
The problem with this strategy is that Central Banks can play a lot of tricks to keep the game going on...
The thing I have come to realize is that the Collapse of the Derivatives market is unlikely to ever happen. My rationale and potential outcome for this is as follows.
The FED and the central banks will not allow a collapse of the derivatives market. If derivatives were to seize up, no bank or entity would have any confidence to put their money anywhere. No body would know who was going to pay up on the large, calculated bets various entities were taking and hence the financial system of the world would literally seize up.
The Central banks can't allow for this to happen, hence they are more likely to bail out more Bear Sterns and Northern Rock catastrophes when they happen in my opinion.
Currently, the Fed is getting dangerously low on tangible cash and Treasuries on their own balance sheet. If there is another blow up, I am of the opinion that they will be forced to print money. I think a few people are already sensing this. (Note, unlike you might hear, the Fed is not printing money yet. They are loaning money out - vast quantities of it and for shady collateral - but all monies loaned are expected to be paid back).
So what does this mean? Well, if they print in earnest, then you would tend towards expecting massive hyperinflation in the US. Normally countries that attempt to get out of their current debt and poor financial situation that go to the printing press end up with hyperinflation. Germany, Zimbabwe - all the result of the printing press.
However, I don't think this is going to result in hyperinflation like everyone will expect. It is a bold claim, but my rationale is as follows.
Firstly, they will not be printing to hand money out to everyone. It will merely be to make sure that markets function and no huge entities collapse completely. But no-one will know this for sure, hence the act of starting the press for a few bucks will be the same as printing Billion dollar notes straight off the bat as the market is concerned.
As they start to do this (and I am hypothesizing that it is only a matter of time), oil and energy costs around the world are going to shoot to the moon. Speculators will move everything into energy because it is the only thing that will hold its value once the trust of a fiat system is broken. (A lot of people think Gold will be where the money goes - I think gold would do alright - but the supply of energy is the last truly universally exchangeable currency). I think we are already seeing this speculation occur. If it does happen, $150 oil will be considered cheap. Bonds will not get touched (why would you buy a Treasury that is going to yield 4% when you know full well more fiat currency is going to be printed at no cost in the future - you might as well burn your money now). This will spike interest rates. Equities and houses (which are overvalued by the huge credit being thrown around) will be sold by people loosing confidence and the smart money will all go into energy - the last safe haven of a truly shaky house of financial cards.
Thus, my thesis is that the US will be forced to start the printing press, but this will ultimately crush them due to a huge oil shock and spiking bond yields with a country that is far too indebted. This printing will mean that the derivatives market stays in tact (all bets on the market will get resolved), however, the act of starting the printing press will ultimately not result in hyperinflation, but will rather result in a huge wave of deflation as the money printed will not be able to work its way into the general economy before market forces have dealt with the problem.
It is going to be very interesting to see how this plays out. I don't know much about economics or finance, this is just my opinion at a high level and I would be interested in others opinion on the topic. Interesting times ahead..
Moved from the "United States" forum. Original message number: 666
