For nearly four years, the entire financial system has been held together (just barely) by extraordinary interventions on the part of the world’s Central Banks.
These interventions have resulted in capital fleeing the markets (hence the low trading volume), moral hazard becoming the norm and a marketplace in which hope of more intervention has a greater impact than the actual intervention itself.
The problem with this, from day one, was that eventually we would reach the point at which additional intervention no longer had any effect. This would come about due to:
- Investors having grown so accustomed to Central Bank intervention that they no longer respond to additional measures.
- Central Banks facing a problem so massive that it is beyond their power to stop it.
Few people understand just how close we came to #2 early this past summer. Indeed, there was a brief period there, where we were literally on the verge of systemic collapse courtesy of the Spanish banking system imploding.