Is the Central State Too Big to Fail or Too Big to Survive?

oftwominds.com / By Charles Hugh Smith / January 22, 2013

We are currently in the relatively brief interim when systemic risk has apparently been eliminated by financial alchemy. This cannot last for purely ontological reasons.

We can summarize the Central State/Banks’ “fix” to the 2008 global financial meltdown as one gargantuan expansion of debt, the risks of which have been distributed to taxpayers and what’s left of the private financial system.

As noted in yesterday’s entry on risk, growth and security ( The Grand Tradeoff of Risk/Innovation/Growth and Financial Security), risk cannot be eliminated; it can only be suppressed temporarily or transferred to others.

The Central States and their Central Banks have suppressed the risks created by this unprecedented expansion of debt with what amounts to financial alchemy: the States issue new debt (sovereign bonds) and the Central Banks buy the debt with newly created money. The sovereign bonds then sit on the Central Bank balance sheets as assets.

Presto-Magico, interest rates remain near-zero, enabling further expansion of sovereign and private debt. Risk appears to have been eliminated, since the Central Bank balance sheet is not exposed to any market influence. Theoretically, the Federal Reserve balance sheet could expand from $2.9 trillion to $29 trillion, and the risk of such expansion would not be priced into the market or economy.

But since risk cannot be eliminated, it can only be distributed, what is actually happening is the Central Banks are distributing the risks of their alchemy to the entire economy.

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