Following with the article Financial weapons of mass destruction unleashed in the US (the party is over) that I recently wrote, it seems like the liquidity storm is enjoying some calm. Not a bad thing when liquidity is the tip of the solvency iceberg, and when investors need a break in the increasingly bearish market.
Yes, it all began with an excess of funds that permitted spending in excess. And from that excess, excessive and ultra sophisticated imaginative investing products were made. The trouble is that they were so complicated that the risk wasn’t understood enough, or simply ignored. Now the risk has resurfaced again and debt ratings are on its way down.
In that scenario we had several options: to cut the excessive spending or to find new lenders. Looks like we’ve encountered some new ones.
The first are the public lenders, also known as monetary authorities. By increasing the monetary mass, and providing low-term credit to low rates, we have financed ourselves. Not a bad thing to do if we were a socialist economy, which we are not. But time will say if we have many other options. I fear we don’t.
Wait, there’s still another option. The ones that actually created the liquidity bubble are coming to our rescue. After all they are the ones benefiting from selling 100$ barrels of dark oil. And now they can come to rescue our banks, our real state using sovereign funds. Suspiciously these new lenders remind me a lot of the old ones…
Both refuel the shrinking bubble in the hope of inflating it again, but in the meantime the true inflation is rising and growth going down the slope. Either we finance ourselves or we trust in opaque investment artefacts coming from non-democratic countries.
But this time, if we are being refinanced, it will be either at higher rates or lower prices, there’s no way to ignore the risk. Are we really aware of the costs of refinancing? Are we facing the real issue here? Reality tends to be stubborn.