Here's the thing about gambling: risk cannot be made to disappear, it can only be transferred to others.
Those taking seats at the gaming tables in the Federal Reserve's casino believe that they can't lose. Or more precisely, any losses they suffer will quickly be made good by the house, i.e. the Fed, which can digitally print as much currency as needed to restore order to the gambling.
The punters crowding around the tables have forgotten that gambling is inherently risky. The Fed can digitally print currency, but it can't force punters to play.
Unfortunately for all the punters crowding around the tables, the casino is on fire. The
Fed's rigged games are in flames, and Head Tout/Fixer Jay Powell is
telling all the nervous gamblers who smell smoke to please stay at the
tables and continue gambling, the fire is under control.
But of course it's not under control, it's raging out of control, and to maintain the illusion of control, the Fed is buying chips in its own games: buying junk bond funds and corporate bonds.
The Fed's casino has operated on a simple principle: the
Fed digitally prints trillions of dollars and hands the dough to
broker-dealers in exchange for Treasury bonds, mortgage backed
securities and now, junk bond funds and corporate bonds.
The
new currency flowed into financial assets as banks, corporations and
financiers borrowed money, leveraged it up and bought back their own
shares or bought stocks.
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| Graphic Source: Visual Capitalist, added by EconMatters.com, not part of the original article |
What the punters don't understand is this mechanism isn't guaranteed. The
players getting the freshly created dough don't have to buy stocks or
junk bonds. They only do so when they are confident that there are
plenty of greater fools at the tables to buy these assets at higher prices.
The pool of greater fools is drying up, and so the Fed has been forced to start buying its own gambling chips directly. This
is an act of complete desperation, yet the punters at the tables who
smell the smoke don't yet realize the fire is out of control and the
entire casino will soon be engulfed in flames.
Here's the thing about gambling: risk cannot be made to disappear, it can only be transferred to others. The
absence of risk in the Fed's casino is an illusion. The Fed's casino
has transferred all the well-hidden risk to the entire financial system,
which is now in danger as the Fed's burning casino triggers a
conflagration few even imagine and virtually none think is possible.
So
by all means, believe the soothing words of Head Tout/Fixer Jay Powell
if you want, but realize that words and digitally printed currency won't
make risk disappear. Rather, they only increase the risk of the fire
spreading to the entire financial system.
Courtesy of Charles Hugh Smith at Of Two Minds, also the author of several books (More by Charles Here)
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