The Inescapable Reason Why the Financial System Will Fail

The comments above & below is an edited and abridged synopsis of an article by Charles Hugh Smith

Modern finance has many moving parts, and this complexity masks its inner simplicity. Smith discusses the core dynamics of the current financial system (the core dynamic of the ‘recovery’ and asset bubbles: credit; the current (flawed) logic we’re pursuing; and the stark conundrum we face).

Central banks are now trapped. If they raise rates to provide low risk, high-yield returns to institutional owners, they will stifle the ‘recovery’ and the asset bubbles that are dependent on unlimited liquidity and super-low interest rates.

But if they keep yields low, the only way institutional investors can earn the gains they need to survive is to pile into risk assets and hope the current bubbles will go higher.

This traps the central banks in a strategy of pushing risk assets—already at nose-bleed valuations—ever higher, as any decline would crush the value of the collateral underpinning the titanic mountain of debt the system has created in the past eight years and hand institutional owners losses rather than gains.

This conundrum has pushed the central banks into yet another policy extreme: To mask the rising systemic risk created by asset bubbles, central banks have taken to suppressing measures of volatility, measures that in previous eras would reflect the rising risks of extreme asset bubbles deflating.