Peak Collateral

Tyler Durden's picture

Originally posted at Golem XIV's blog (author of The Debt Generation),

I wonder if we are reaching what we might call ‘Peak Collateral’?  That state when the creation of assets, which the market will accept as collateral, is insufficient to sustain the demand for credit.

It’s funny isn’t it, how the terms we use, or are encouraged to use, have such an influence on how an analysis unfolds. So much of the eventual conclusion is already encoded in them. Especially the terms we are encouraged to choose as our starting place. Our leaders and the bankers have been so very concerned that every analysis begin and end with liquidity. But I think it is becoming clearer by the month that collateral is a more revealing term.

When Lehman Brothers and AIG collapsed was it just a shortage of liquidity? No of course not. That’s like saying a man with the plague died of a high temperature. Certainly he had a temperature when he died but it was a symptom not a cause. Both Lehmans and AIG were running out of collateral and without collateral for the oxygen of repo and short term funding, they began to suffocate. Once those two began to choke, the money ran out for others. The collapse of Depfa and Hypo in Germany/Ireland, for example, was a direct result of them not being able to get the funding they relied upon from their sugar-daddy funder, AIG. That created a domino effect. AIG had run out of assets that it could pledge as collateral. It could not raise money that it could then use to lend to HYPO/Depfa. Hypo in turn had such poor assets they too had little or no chance of anyone accepting them as collateral.

It seems to me we are moving back to a similar situation.  You might ask, out of sheer exasperation, how it could be, given all the tough talk and all the new requirements for capital and risk management? How, after all the bailing outs and now ins, all the endless and global QE, all the new rules and capital buffers, that we do not seem to have really got anywhere?

The image that comes to my mind is of the strange attractors which govern the lives of any non-linear system. And global finance is certainly made of many such non-linear systems.

This is the Lorenz attractor that governs convection in liquids and is thus one of the attractors which makes our weather both unpredictable and relatively stable. And it is this unpredictability within parameters which is one hall-mark of non-linearity.

Within an attractor, trajectories appear to jump around, taking hair-pin turns, reversing and re-reversing without warning, or rhyme or reason. Yet for all their unpredictability they are always orbiting within the shape of the attractor. The attractor is simply a map of all the possible states the system can be in. Each point on the attractor is the state of the entire system at one moment.

It turns out that non-linear systems which are massively unpredictable from moment to moment, are nevertheless still bounded. Map all the possible states the system can be in, and you find a shape. That shape is the attractor. All the system’s many states exist within its bounds. Every trajectory, no matter how alarming in its twists and turns, collapses and recoveries, is some complex orbit within this shape – this attractor. And this, I think, is what we have been following for the last 5 years since that first set of dislocations occurred - another orbit of the attractor we have never left nor attempted to alter or escape from.

Our political leaders and their financial masters have made it clear that they will not really countenance any real change to the system. They were always willing to talk of ‘better’ rules or ‘tighter’ regulations but never of systemic changes. And thus, I would argue, nothing that has been done has changed the underlying nature of the global financial system nor, therefore, of the attractor or coupled attractors which govern it. We, therefore, have been careening round the same attractor as before, mistaking the gyrations and permutations inherent in it, for  signs of change.

Every attractor has a central region where the non-linearity resides. In the Lorenz attractors it is on the central saddle. For the last 5 years we have simply been passing through this region and being flung about as we did so.

Of course a system like the financial one is not governed by a single attractor. There are surely many. I am interested in the role and trajectory of ‘collateral’.

There are conflicting forces pushing and pulling at the route collateral takes.

On the one hand everyone is desperate for yield. They want assets which give as high a return as they can find and that generally means assets that are unsafe and full of risk. Such assets are lucrative but, because they are risky, are not easily pledged as collateral themselves, and in fact require a lot of regulatory capital (other assets) held against them.

On the other hand, the same people who want risky assets,  also want assets which are as AAA safe as possible. These are not lucrative themselves but can be used as collateral for short term funding and/or as regulatory capital against the riskier assets.

The more risky the assets you have, the higher your VaR (Value at Risk) and your Counterparty Risk ( the risk that you may lose money because the  businesses to whose fortunes you are linked, via you assets, may themselves lose money)  which are two of the main things that determines how much regulatory capital you need to find and hold.

You may well look at these two conflicting desires and wonder what the problem is. Surely it is just a matter of a prudent balance which can be adjusted as times and needs change? And of course you are right. In the ‘normal’ course of events one person wants to re-balance in one direction, another the other way and the market is there to facilitate.

Two problems arise however when times are not normal. And ours are not.

That neat notion of the market facilitating people wanting to re-balance one way or another presupposes that people’s needs are evenly distributed. Some need more risk others less, some more collateral others less. But what happens to this happy picture if everyone has too many risky assets and wants fewer, all at the same time? Or when everyone wants solid assets to hold as collateral all at the same time? The market is useless at those times because the market is only the pairing of seller and buyer. If there is no balance then there is no market. The invisible hand becomes palsied.

What people really want is assets that are both high yielding and safe enough to pledge as collateral. And where there is a desire the market will provide. And what it provides, seen from the outside, is a bubble. A bubble of unreasoning and unreasonable exuberant make-believe that something that is risky is also safe.

In 2007, risky and lucrative but still safe and pledge-able was mortgage backed securities. Today the same role is played by sovereign debt. Our lords and master did nothing to alter the system and the desires and distortions it demands/creates, they have merely found a new way of satisfying and sustaining the system. That it has jerked and convulsed back to life, they are keen to call ‘fixed’ and ‘recovered’. Re-animation is perhaps better. Nothing has been fixed. Certainly nothing changed.

Where ratings agencies rated any old securitized tat as AAA, today governments and international bail out funds make extravagant claims of being willing to do ‘whatever it takes’ to ensure that government debt is risk free.  This has opened a wonderful world where nations can be kept in a state of permanent poverty and panic, forcing yields on their debt up to very lucrative levels, while also allowing them to be held as risk free and therefore perfect collateral.  How quickly do you think the banks want to see those nations ‘fixed’? I would hazard that they would prefer that nations are held in this perfect state of fiscal impotence for as long as it takes to arrange the fire sale of its real assets.

All of which, to my mind, describes where we are. A seeming victory for the banks and financial class.

And yet…

As I have written before, the real risk of assets cannot be magicked away. It can be traded, as it is being, in magic sounding new trades to new people, who assure you they can contain and manage the risk in your assets in return for a fee. You keep the assets, they take the risk.

Believe the soothsayers of regulatory arbitrage, and the risk which used to weigh upon your balance sheet, disappears out of sight out of mind. Gone to some mathematical null space from which we are told it cannot escape. But we all know it can and will.

Where is this regulatory capital trade putting the risk really?  As far as I can trace it, it is being bought by hedge funds. And who owns those hedge funds (owns their shares)? Pension funds. Ooops! Once again the market’s answer to those who say too much risk is systemically suicidal, is not to reduce risk but to put it where the regulators are not looking.

At the same time as risk is once again accumulating out of sight and mind, collateral too is once again becoming a problem. The problem is no one is creating new assets which really are safe and solid. They aren’t because everyone is labouring under such an overhang of debt and bad debt that the organic growth of wealth producing activity (researching and developing and then making and selling stuff) is too slow.

Everyone wants yield now, if not sooner. And when I say everyone, I mean the financial world and those Treasury parts of businesses which are more a part of the financial world than they are a part of the manufacturing company whose name they carry.  Think of the financial arm of GE or GM.

Everyone wants collateral. They want it in order to pledge to central banks in order to get those AAA rated sovereign bonds. They want it to pledge for short term funding so they can keep breathing at night. They need it in order to be declared safe with adequate capital held against their loans.

But no one wants it really, not from the yield point of view. Better to say they are forced to ‘want’ it. If they can find a way to have collateral that is somehow also high yielding they would much rather have that. Which is at least part of why Cypriot and Greek banks held so much Greek debt and why MF Global kept buying Greek and Italian debt rather than safe German debt, till it all blew up and everyone but Joe Corzine got hurt.

Collateral is getting scarce. What truly is safe, has long ago been pledged mainly to the central banks. The rest has been ring-fenced into covered bonds and other super-safe investments. None of it also pledged elsewhere or re-hypothecated onwards to prop up other loans – honest! Even the central banks have had to relax and further relax their rules about what they  will accept as safe enough to act as collateral for a central bank loan. Once it was genuinely AAA rated assets. Now if you have a beach towel from a Club Med holiday you once took, it’ll do.

Once we had fiat money. Today we have super fiat, ultra fiat and super ultra zero-content fiat.

Why do you think China is buying more and more gold? I wonder if China isn’t preparing for a contingency of a currency implosion and is making sure it has the necessary gold reserves to market the Yuan as the only ‘gold’ backed global currency.  Just a thought.


Peak collateral is just a notion. The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. I think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be  the solution.

The replacement for AAA rated, yet very risky/lucrative mortgage backed securities is AAA yet junk sovereign debt that can never default but sometimes does.

What all this is enabling is the looting of those nations that are already upon the debt rack. Will it sustain? No of course not. But what does that matter to those enriching themselves in the mean time.

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ekm's picture

To whomever thinks QE will not stop this is a reminder of how money is printed:


As per the law, the only way to print money is something.





Now wait, the whole system is based on the abundance of collateral, isn't it?


fonzannoon's picture

The average sheep has no idea what QE is, or how collateral plays a role in the system. The understand that the economy is getting better and the stock market is finally on firm ground. Should a major bank flop right now because of some collateral issue in the backdrop of the system, the sheep will realize they have been lied to and everything that has happenend the last four years is one huge lie. They can't let it happen, unless they are prepared to collapse the banking system.

ekm's picture

Hm, I'd say there are no average sheep.

If one allocates his time to knowing this, that one will understand = no sheep

If one does not know = sheep.


The more time passes the more I think THEY will stick this to a 2 or 3 pension funds or insurance companies as you say, but not Primary Dealers.

Regardless, it's the same concept. Somebody big has to vaporize.

fonzannoon's picture

There is a much better chance they get away with keeping the system intact with a pension fund of Insurance company biting it because they can claim "that individual company dis something stupid". Take down a bank and take down insured deposits and boy that could get crazy.

You are right about the sheep. There is no average one. I'd say 9/10 people have no idea what QE is, and the one that does thinks it is the thing the we are doing to create jobs.

ekm's picture

It's morel like 9999999/10000000 people do not know

HeavyShadow's picture

Having banks filter our money 'for us', when really the issuance of money was given to the people ...reality is too sick for the masses to even begin to face it...same shit, century upon century... They really hid the truth well with the fed...a super trick...

ekm's picture

The scenario would assume that the pension funds or insurance companies would swap good collateral or theirs with bad collateral of primary dealers, which would require mandatorily leaders at pension funds would do that on purpose, Corzine style.


I don't think that's possible because pension funds portfolio managers are very honest people.................(very, very, verrrrry honest)

disabledvet's picture

they're required by law to hold treasuries. that's called "regulatory capital." only Hank Greenberg said "to hell with that. i'm here to blow a 180 billion instead." they're holding treasuries as regulatory capital (if they weren't before...which i would argue the bulk of them were.) this includes pension funds as well. REGULATORY other words "if you don't have that we can arrest you and stick you in Gitmo for the rest of your life." in other words "if you blew you companies pension fund on wilding in alternative investments and thus blew up your pension can kiss the PBGC goodbye...YOU blew that thing up not the American taxpayer. no bailout." i know...i know..."in reality they get the money anyways." but i'm not so sure actually. anywho "awful quiet around here these days." the problem are "actuarial considerations" or payouts...without the appropriate level of contributions you can be running a large surplus (California) but still have it hiding a massive deficit. depends on what you allow your pension funds to invest in. suppose to be AAA rated only...but after 2008 no one really even knows what means anymore i think...other than treasuries. certainly doesn't mean sovereign debt in any form outside the USA in my view. some muni's are looking really good here. railroad equities and debt look fantastic. some...but certainly not all utilities both natural gas and electric.

markettime's picture

Revalue gold at 25, 000, then print more.

prains's picture

Ken  Lay was CEO of a criminal enterprise called ENRON and their crimes were aided and abetted by Anderson Accounting

disabledvet's picture

eh. massively devalue the yen...10 billion to one us dollar should it.

HeavyShadow's picture

Yes, I would agree something has to vapourise. A solitary fortune teller may be able to make rent on future knowledge. But an entire system geared upon future, yet unknown productivity is a castle made of sand - might look pretty impressive on the face of it, but hang around long enough and it quickly erodes.

Unfortunately sheeple seem to like pretty sand castles and dont mind a death pledge because everybody else has a two car garage.

Time has not yet passed enough to not be able to correct the wrongs of 2008 and string some fat rich pricks up beyong a bank or two gone bust. Order can be restored, and collapse is nigh.

Bindar Dundat's picture

Stop Stimulus — Start Building a Country Again

Time to Stop Complaining and Start Building our Way out of this Economic  HELL Hole.

There is an old saying if you have dug yourself a deep hole, stop digging.  But, that old saying” does not stop you from investing in the stairs and a ladder to get you out of that hole.  It’s time for us to continue building a strong North American society that will last forever. Forget stimulus, start building a Country again.  It’s time for the next BIG PROJECT.

Humanity is always evolving. It would be against our nature not to try to build a better world.   The cave men had to learn how to make fire to evolve, and we have smart phones that replace the old antiquated cell phones.  Whether you are a Cave dweller or a techie the one constant is change. Progress does not always accompany change but that is because we are fearful  of making a mistake.  Many politicians know that making a mistake might cost them their future.   It is this fear that prevents us from embracing big bodacious visions that are the traditions of our countries growth.  Reagan had Star Wars.  Kennedy had the man on the moon and the first Prime Minister of Canada had the Transcontinental railway.  All of these projects changed the world and all were the centre of controversy. Nay sayers were always fearful and it took real leadership to say damn the torpedoes full steam ahead.   The reasons to do nothing or take the easy way out is always because someone is fearful of something.  The question I always ask is ” What would I do if I was not afraid and what is it exactly that  I am afraid of?”

What fear are we facing now?  Our national debt and the fate of our banks?  Let’s discuss that fear.

We get bombarded with media coverage that debt is bad and so what do we do?  We keep our economy on life support by printing/borrowing  trillions of dollars and the only people who really benefit are the bankers and the Federal reserve ownership group…oops — those are bankers again.  The bankers seem to steer us away from nation building  big mega projects because it is risky and , more importantly ,would take money away from them.  This is a ridiculous situation for us to be in.  Big projects will build our country and create jobs and if they are chosen correctly a big mega project will give us security far into the future.

What  problems  must we solve to continue to evolve society?  How can find an honest , long term solution that adds value to society and is prudent financially for the citizens — not the bankers.

Stable and secure energy, adequate food and water, and reliable transportation are  real problems far into the future.

So if we pretend for a minute that we are building a society that is going to last forever; what would we do?

How could we increase the security of our energy supplies?

How could we use that energy to produce and then transport our food supplies throughout North America efficiently?

What major infrastructure project could we imagine that would address these issues and create millions of jobs in the process?

What I think we need is a mission and a project to make the mission a reality.

  • The mission would be to make NorthAmerica the safest place in the world to live work and raise a family.

The project that would make that a reality would be:

“The SUPER GRID for Electric Power and Transportation”

Imagine about 100 underground multi-Gigawatt nuclear reactors placed strategically around the U.S.A. and Canada.  (They are underground to protect against terrorist attacks and to ensure proper containment of the material.)   They could even be interconnected with superconducting transmission facilities to ensure we could move energy around when we need to.   Total cost could be budgeted  between $3.5 – 4.0 Trillion.

Imagine using the energy from these reactors to provide secure power to major North American Cities.

Imagine this energy also being used to drive water desalinization and food growing facilities across North America. ( Climate change be damned!)

And now for the icing on the cake. Imagine using that energy to power  a high speed multitrack electric rail  that would connect all the major population areas in North America.And it would do so for the next  two hundred years.  The cost of this including switching and coaches etc could be budgeted at around $1.5- 2.0 Trillion.

This ” super grid”  could create millions of person years of employment and secure the energy, food and transportation needs for the balance of this Century.     That debt issue starts to look a little more manageable when put in a 200 year prospective and with the benefits more clearly articulated. Certainly feels better then bailing out the bankers.   There remains the issue of political agendas.

OK now let’s talk about the major agenda barriers between the left and the right;the left would have to swallow nuclear energy and the right would need to swallow on the increased debt by  $5.0 Trillion.

That $ 5.0 Trillion sounds scary, or does it?

Let’s pretend, for a minute, we are not afraid of debt.  Come on be truthful it feels good to pretend you are not afraid of that, right?  It is freeing to your imagination and allows you to seek the long term, value added and honest approach to this opportunity.

First off, these projects would create jobs for an entire generation of people and a project of this scope would restore faith in the future for all of us.  We would be building a great Country again and the economic spin offs from this would be spectacular.

Second, the reliable energy and transportation would make North America highly competitive in manufacturing again creating even more jobs and increasing our GDP growth by a measurable %.   Even a modest acceleration in GDP would be significant enough over a hundred years would make this project look like a great deal in 2112.  You might even be able to call it visionary and the politicians that made it happen would be historic in their legacy.

Thirdly , we would pay this debt of over a hundred years and if inflations stays where it is we would be paying it off at pennies on the dollar of today. Todays currency buys about 4% of what it bought one hundred years ago.  In one hundred years the $ 5.0 Trillion will likely be only $ 500 Billion in the dollars of the day. The debt issue is not that big a real issue and in a hundred years they will laugh at the debate we had. The fear of debt appears to be the root of all evil. It goes back to that old saying : ” when you are in a deep hole–stop digging.”Right now is exactly the time to challenge that old saying and see where it leads us. Right now all the solutions seem to revolve around the banking system. There is another old saying: ” When your horse dies — dismount! Let’s stop arguing over the dollars.

That Nuclear Power Sounds Scary, or does it?

A Fukushima type disasters can’t be tolerated and the answer as some has said is humility of design. They must be “walk away safe” so that even if everything possible goes wrong they will still be contained and the outcome will always stop short of disaster.  There is also the prospect of safer fuels like thorium, which is more abundant and can’t sustain a reaction .  And after all it is a good technology challenge that keeps moving us forward as a society.  The research  we would undertake to make this happen would push the practical limits  of science and the spin offs would benefit  those of us who were brave enough to think honestly about a long term solution to add value to the our continent.  One rule I always believe in is that the long term solution will always produce the shortest term positive results and this will be no exception. Canada and America again will take a leadership position in science and sustainable  energy and we will again be that shining city on the hill.

So I am all for a major project that moves Canada and the U.S.A ahead  and builds a ladder so that we can get out of this hole we find ourselves in.  Let’s stop making the bankers rich and lets build a future for the people of North America.

noless's picture

Not that i generally disagree with you're assertions, nor their feasibility. But i still feel justified in posting this:

spinone's picture

How about a real passenger rail system in this country.  Not high speed or anything, just passenger rail connecting metro areas 300mi apart or less, and regional airports to metro areas.

Promethus's picture

My hat's off to anyone who has a plan to dig this country out of the hole it has been put in. Your plan appeals to thinking individuals who can work together to make a better world - which is why it is doomed.

As you are planting the seeds for a new age utopia, Obama's food stamp army; swarms of illegal aliens; packs of tree hugging socialist, geriatric hippies; and multi layers of governments are waiting to devour the seed corn.

supermaxedout's picture

Nuclear power is shit. Its main purpose is to produce the materials needed for the bombs and war heads. Thats a fact. No sane investor would ever put a dime in nuclear to produce electricity. Its only the government that forced it upon us while telling us a lie about the "peaceful use of the atom".

Try renewable energy. Makes much more sense. The energy is there provided in million times bigger quantities ever needed. You just have to make it work. Plus renewable energy is more of a decentralized thing thus many more people will have a job or something to do. Plus its not that extreme poisonous and dangerous. , Plus, Plus plus etc.

The only disadvantage you can not make bombs out of it. uaaaah


Totentänzerlied's picture

"Try renewable energy. Makes much more sense. The energy is there provided in million times bigger quantities ever needed. You just have to make it work. Plus renewable energy is more of a decentralized thing thus many more people will have a job or something to do. Plus its not that extreme poisonous and dangerous. , Plus, Plus plus etc."

Shill harder. Decentralized, right because everyone has a rare earth element mine in their backyard, and a solar panel factory in their basement, and plenty of free energy to run all the manufacturing processes. Chinese waterways prove the lie that it is not poisonous and dangerous.

And be prepared to be losing money, and energy inputs, the entire time. "Sustainable" seems to be a relative term.

Totentänzerlied's picture

You pay for it, big shot. PS: take a look at an oil price chart, if you're not just another shill, and immediately you will understand why the age of monumentally stupid monumental malinvestment projects such as nuclear weapons, the interstate system, and the space program are OVER. Forever.

dolph9's picture

The mantra of the wall street wizards is "i'll be dead, you'll be dead."

They do not give a shit about anything, or anyone, at all.  You really have to get that through your head.  Maybe they are smart enough to know this whole thing is a shit sandwich titanic that is going to fall to the bottom of the ocean never to come up ever again.  And maybe they're response to that is this philosophy, and maybe it's correct.

But, we still have to live in their world.  That's the whole point.  That gets to the heart of the matter.  WE have to pay back their debt.

This is where it gets interesting, because then there might be a class of people who say "fuck it", but use it AGAINST wall street.  That's what wall street never counted on.

Think not paying back your debt, or going galt, or putting all your money in precious metals, etc.  What does any of it matter anyway?  The only thing that matters is that you play the game and pick a side.

This is what gives me the strength to accumulate metal, and just keep on accumulating no matter what the price.  I don't care anymore, I'm "all in" because we're on the titanic and we have to decide what we're all about as this story comes to an ending.

Hohum's picture

So, if the Fed buys 40B of MBS per month, when will all the MBS be gone?

noless's picture

Looks like total outstanding is around 13 trillion, didn't check which line item mbs falls under on the feds balance sheet, but I'm guessing mild to moderate googling could find you the info, as long as they accurately report it of course, which I'm fairly certain is debatable.

Hohum's picture



Seems to be over 7T from the table.  If so, that will take 14 years to get to zero, in theory.

noless's picture

I'm sorry, I'm confused, are you stating that the fed already owns 7 trillion across the board for all mortgages?(half of all outstanding)

If so, how is that allotted? Primarily farm? Residential? Commercial?

Or just that i was viewing the total outstanding incorrectly?

Hohum's picture

In breaking down the overall number, over 7T is held in trusts--my interpretation of the table.

CH1's picture

So, the Fed is buying mortgages at $40B/month.

And if the mortgage holders default (which can easily be arranged), the Fed owns the houses, yes?

Interesting scam.

Totentänzerlied's picture

Sure, but let's be clear that the Fed is really just a clearinghouse/toothfairy for the member banks. So it's more of a circlejerk whereby the banks get the houses for very little, or even free, one or more times.

Winston Churchill's picture

The real, or phantom RMBS ?

We can worlk out very easily how much RMBS there should be,Trouble is that figure

somehow got multiplied 10 to 42 times.

Talk about a shortage of collateral.

Which begs the question; WTF did the money go ?

Mentalic's picture

I remember seeing an article here on ZH some time back about the same thing....guesstimate was around 2017 I think...

besnook's picture

i just said the same thing in less than a paragragh but this is a much more interesting concept to explain it.

HeavyShadow's picture

100 year birthday for the fed this year... Was built on the reasoning that a mechanism should be provided to 'save the people' from economic woe...

Didn't really stop the great depression. Nor the tale of the last 5 years. I often wonder what it is really used for.

The creature from Jekyll island is such a Jedi mind trick for the masses. Except it was engineered by the Sith.

Cloud9.5's picture

The Fed was and is used to fund the progressive agenda without the visible consequence of raising taxes.  It is the cause.  It would be God in that it conjures something from nothing. 

kita27's picture




Dead Canary's picture

Collateral! We don't need no stinkin collateral! Just re-use the stuff we got. Over and over and over......

Just when I was getting used to the fact that we live in a house of cards, I find out it's built in a swamp. Over a fault line.
And the swamp is full of werewolves and cyber-gators.


(  hold me  )

buzzsaw99's picture

margin requirement to zero, s&p to infinity. bitchez.

buzzsaw99's picture

“Frankly, it makes a huge amount of sense in a world of floating exchange rates and such incredible opportunity, why should central banks keep so much money in very short term, liquid things when they’re not going to ever need it?” O’Neill said. “To help their future returns for their citizens, why would they not invest in equity?”

pitz's picture

Sounds like the collateral itself needs to be revalued, ie: real things, real output, real skills, need to increase in value relative to stuff that's just supported by debt, or debt itself.  This would be positive for gold and silver, as well as the employment prospects of engineers, artists, and others who actually create stuff.  As opposed to the past few decades which have mostly been of benefit to the financier class seeking to put debt against anything that can possibly be indebted. 

Withdrawn Sanction's picture

The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be the solution.

And yet if the fiscal authorities keep issuing debt to their central banks, the value of that (previously) AAA collateral itself gradually diminishes.  This is because at its core, the value of that collateral ultimately depends on the ability of the taxpayers to furnish the value necessary for its repayment.  Unfortuantely the Fed's programs are destroying the capital base necesary to employ people at a profit and thus the ability to earn incomes, pay taxes, and thereby to service debt.

Of course, the other side of the ability-to-pay coin is willingness to pay.  That too is diminishing as especially the younger generations see they've been sold a bill of (phony) goods.  So even if they had the ability to pay (which many dont), they are still very likely to reneg on paying (as they properly should).  Why should they?  They'll be asked to pay a bill for which they had no say in creating.  

Either way the Fed (and other CBs) are in a box.  They cant stop for the reasons cited in the article, nor can they continue much longer because in so doing they undermine the value of the very collateral they are buying.  Yes, yes, they can print currency or its electronic equivalent, but they cannot print value.  If you dont understand the difference, you soon will will the Fed.  

Jig's up boyz....account overdrawn.

q99x2's picture

FEDs lost control. Military needs to move in and clean things up there and at the TBTFs.

Greed gene is about to have difficulty propagating again.

22winmag's picture

Listen to the way this dude says "...lacking any *collateral* at all."

Aurora Ex Machina's picture

Golem is a smart rabbit, and has been on my read list for a long while now. Good to see him here, it's a move away from the dross of old has beens "I like fucking young Asians" into the new. ZH - get into the new stuff out there, there's a world of smart bunnies wanting to make you money. Early Warning is one that will tickle your fancy (and a very smart guy).


No, we're not going to fade this time.

HeavyShadow's picture

Yes, golem was the one who helped fully remove the wool from my eyes. Long before I found ZH. He writes with soul.

Tourist2008's picture

The collateral ran out long ago, its just that no one dares admit it. Who will refuse the type of collateral that they themselves will be offering next week, or that they offered last week so some zombie central banker.

Forget "peak collateral" .... think "no collateral" ...

toadold's picture

Money is so tight right now Goldman Sachs is using Kickstarter to get enough money to buy an Island that they can stock with serfs and slaves....It is called Cuba.

besnook's picture

the real problem is all this risk hedging callateral pyramiding scheme is the reserve of actual cash to pay anything near a collapse liquidation. the model is so leveraged that a cash shortage would collapse everything in the blink of an eye.

with that kind of risk in the context of the times where would you rather be? and if that position gave you great advantage in the smoldering ashes what would you do with it?

sounds like a plan.

Mentalic's picture

+1 for mentioning strange attractors...


and yea, this of course....


"Where ratings agencies rated any old securitized tat as AAA, today governments and international bail out funds make extravagant claims of being willing to do ‘whatever it takes’ to ensure that government debt is risk free.  This has opened a wonderful world where nations can be kept in a state of permanent poverty and panic, forcing yields on their debt up to very lucrative levels, while also allowing them to be held as risk free and therefore perfect collateral.  How quickly do you think the banks want to see those nations ‘fixed’? I would hazard that they would prefer that nations are held in this perfect state of fiscal impotence for as long as it takes to arrange the fire sale of its real assets."


sums up the current state of sovereign financial affairs perfectly

RazvanM's picture

So, what's all the available collateral in the world? How this collateral can be pledged? What is the meaning of property?

I mean, if I "own" some property, but there are others owning the right to tax me on my property until I bleed, who owns the said property?

More than this, the State (down to local authorities) borrows money on the premise that it can tax any property within their reach. So the State pledges my property as collateral for money to spend.

Now, what about the State spending money? There is no contract between "us" and the State enforcing how the money will be spent. Only some "understanding", "social contract" signed by nobody in my name. There is nothing whatsoever I can really do to decide how I want the State to spend my money - so there is nothing I can really do to decide how should I own my property.


Zooming out, there are some nice little databases out there having all the details of my life: where do I work, how much I earn, how much I spend, how much I pay in taxes, what I "own" whom my friends are, what is their financial condition, where do I go (think mobile position), what do I write, what do I say, what my medical condition is etc. Extrapolating, it's very easy to construct some models from this and fine tune a society by playing with such a small little detail as the interest.

The only way to "play" such a game is to not be part of it.