Friday, June 22, 2012

The Great Depression II
The Fed brings interest rates low as a result of a combination of 9/11 and the bubble.
The American Banking sector and the European Banking sector can now afford larger leverage and we see a boom in bank assets.
Anyone who knows his basic derivatives knows that the leveraging done wouldn't have been possible with the ultra-low interest rates and thus wall-street was able to create MBSs, MBS squared, cubed etc...
Concurrently, the low interest rate regime turns the north to net debtors as savings doesn't make sense any more.
The growth in money supply increased demand for these structured securities  which then creates demand for mortgages and this leads to a housing boom never seen before.
Of course the money created by the FED goes on to create a worldwide rise in commodity prices leading to distress all around the world. Remember Oil at USD +120/bbl?
Interest rates rise with the inflation and all business models based on high leverage, including the American and European Banking sectors and the derivatives, begin to fail.
The FED and the ECB take back the North to the low interest rate regime that caused the mess in the first place. Now the North is addicted to low interest rates...basically riding a tiger if you will and can't disembark because then these economies will be mauled by the resultant recession that they have been putting off since 9/11.