Whatever the problem has been in the recent past, governments and central banks chose the easiest way by creating more fiat money out of thin air.
But the ongoing growth in money supply will turn into an unbearable burden for taxpayers in the medium term who are coerced to pay for the financial mess in what will become the next global trend: A train wreck called fiscal policy in support of the banking industry that may run into a head-on collision with future national outlays like pensions and medical care.
It is outrageous when G7 finance chiefs get together only to indirectly announce more toxic liquidity, negating their own failures by letting money supply run wild via cheap credit in the past years.
"The current situation calls for urgent and exceptional action,'' the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to "take all necessary steps to unfreeze credit and money markets'' without detailing how that would be accomplished.US taxpayers may soon get confronted with the doubtful joy of nationalization with their money as the imperium in decline plans to take direkt stakes in banks. Don't get angry now, treasury secretary Hank Paulson has tabled a lot of emergency actions by now that have failed to find support on Capitol Hill.
In Europe taxpayers may "only" be required to pick up the tab while Germany's chancellor Angela Merkel sounded happy when saying her country would not take direct stakes in banks, but the Eurozone would apply the same toolbox of policies, Bloomberg reported.
With all respect to the German chancellor, somebody should remind her, that this toolbox of policies has failed to reduce the stress in credit markets in the past 15 months.
ECB Pumps $100 Billion In Four-Day Repo
Checking on tne open market operations of the ECB, a four-day repo with a volume of $100 billion tells me volumes on how bad the situation is especially for European banks. I have lost track of the steady expansion of the FRN swaplines, but including this mega-giga repo the ECB has pumped some $265 billion in the Eurozone banking system.
Swaplines Bring The USA Forex Reserves
Expect further growth of these swaplines as this is also a most convenient way for the Federal Reserve to aquire forex reserves which can be used to support FRNs on their next downleg against the Euro.
I cannot pinpoint it, but it appears as if European banks are in such trouble that the meeting of Eurozone officials in Paris this Sunday has to come up with a statement that will prevent another wild selling wave in stock markets.
It is certainly the easier task to observe strains in the banking industry than to find a solution for it that will not hurt.
So far politicians and central bankers are trying a cure that has not resolved anything, but has blown up balance sheets even further. Like a junkie in denial the Eurozone tries to end its addiction to cheap money with ever more of it. We know this cannot work.
But other steps, like letting the market sort it out by itself, are highly feared as this would immediately lead to a dramatic economic contraction when credit, the lifeblood of the economy, will dry up completely.
As central bankers and politicians will not be able to come with a thoughtful solution to the crash in progress, expect more market turmoil this week. By now you can buy level 100 calls on the volatility index which ramped up a new record at 69.95 on Friday.
The global margin call and the resulting forced squaring of positions do not leave much room to the upside. When stocks are still in a free fall although crude oil prices have almost halved again there may be more of the same downside momentum to come. This crisis is far from over.