Credit Crisis: Worthless Billions Won't Solve A Problem Worth Trillions

Welcome to the inflationary days. Central banks are pouring money in unprecedented amounts into markets reeling from an insolvency crisis that cannot be solved by throwing artificially created bills of credit onto a market while accepting dubious collateral. Just have a look at the explosive growth of "other assets" in the ECB's balance sheet.

At the same time, European central banks salt away their only asset with alpha performance: Gold. Gold holdings in ounces keep declining, and this practice has never been questioned by politicians so far. Is it ignorance or incompetence? Watching ECB president Jean-Claude Trichet telling a very empty European Parliament on Wednesday nothing new about the current crisis enforces my belief that European politicians do not have the faintest idea how grave the situation is.

"Liquidity" actions by central banks will only delay, rather than deter, the inevitable process of deflating the layers of debt created in this century. After all, what is a few hundred billions of Euros for all European banks when only the off-balance risk of the banking sector of tiny Austria reels under 2.1 trillion of derivatives risk, while having equity of only 73 billion Euros? (This is according to data compiled by Oesterreichische Nationalbank.)

Translate these relations to the bigger members of the Eurozone and get an idea of how big the mess really may be...

So no matter how many more billions Trichet will create, it ain't gonna earn him a paper-jumpsuit from Superman as these new Euros that have grown the ECB balance sheet in less than a year by almost 20% will only worsen the current crisis which was brought on by too much money in the first place.The whole world nowadays knows that the mess was created by too much cheap credit. Only central bankers keep denying this. Extending credit further is not a solution but only a whimpish action to delay the outcome until 2008.

No matter how much new money is created, the day of reckoning will be December 31 when all "assets" have to be priced for year-end results. I think is is fair to advise some cash/gold on hand in January. Just in case the ATM won't work.

Comments

[Lester]

Hello Toni!
My understanding of derivatives is that these are a variety of options sold at a price based on the Black-Scholes formula. That price is the max that can be lost. Even that money is not “lost”, it just changes owner. If nothing pans out as hoped, that is the end of the default. The hopeful “winner” just can’t collect what was bet on. If the bet was as ephemeral an amount as the much touted trillions, it is still just imaginary money, nothing real about it.
An accountant would say, money doesn’t disappear, it only changes pockets. So, where is the loss? Bunker Hunt didn’t step off the fifth floor ledge, Myron Black of LTCM fame is still calculating, so the current players only need to decide how many and which of them should go out of business.
Pray tell what the problem is!