A Good Portion of the World's Money Does Not Exist

Over 15 inches of snow between yesterday and today. FIFTEEN inches! At least I got the day off from work! It took three trips outside to finally clear out all the snow. One can hope that was the last of the white stuff, but you know how well hoping has been working!

AIG Obscenity Perfect Example for What Ails Markets
The latest, greatest AIG bailout was announced today. You can find the details just about anywhere. In summary the government deems AIG to be too huge and too enmeshed worldwide to fail and thus will commit any amount of money to keeping the failed firm operating.

So if AIG got bailed out, would that not be "positive" for the markets? With the government stepping in and becoming the worlds largest insurer why the vicious market action to the downside? Consider that AIG is in so much trouble because they were writing massive insurance notes that were to have protected counter party's from a major market meltdown. Now it was clear to anyone that looked that AIG had neither the capital base, nor the income generation ability to ever make good on these policies should something go wrong. Nobody cared. The illusion was tolerated and even traded on and leveraged up many times over.

The game is up.

A Good Portion of the World's Money Does Not Exist
AIG insurance is not real. The government can give loans and provide "backstops" all they like, but the damage has been done. The so called protection sold by AIG does not exist.

Mortgage backed securities by and large do not have much at all backing them up. Anything written in the years 2003-2007 are basically zeroes.

Stocks finished today where they finished the day in 1996! Thirteen years of "profits" vaporized.

Bank of America and Citigroup both in the low single digits and reliant on government backing to survive. The large multinational bank behemoth does not exist.

I could go on and on.

While the term "Deflation" can be used to describe what is happening right now, it fails to capture the very essence of the tectonic shift of perception. Right now across the world financial players are coming to grips with the fact that most of the "financial engineering" that has been done over the past decade was all built on assumptions. Well, you know what happens when you assume just about anything!

Deleveraging is happening on a scale never seen. Without leverage fiat money programs die. Without expanding credit fiat money dies. Without ever inflating prices for assets fiat money dies. When entities want to hold cash fiat money dies.

The US government will continue to try and craft newer and more size able bailouts over the next couple of years to stem panic and promote speculation. Too bad they are wasting their time and our money. The somber realization that A Good Portion of the World's Money Does Not Exist has finally taken hold and there is little that can be done to help.

So what does this mean? Sadly, lots of bad things. Just a few off the top:
-FDIC Insurance will be tested soon as people really want to know if it exists
-The vaporization of the stock market will have pension plans looking to the government for help
-Bloated state budgets that counted on money that does not exist will face serious trouble
-Lending will drop off even further as the extent of the new reality (money does not exist) means anyone with money will hold onto it
-The government soon will be the only lender in the game and all the terrible things that come along with that reality
-Stocks are dead money for a while
-When bondholders finally are faced with taking "haircuts" due to massive money shortfalls, another entire sector of capital will leave the room taking their ball with them
-Sovereign wealth funds after getting toasted will stop playing, and the regional economic meltdowns in various countries will cause the home governments to take the funds cash anyway for local use
-The government will have their ability to play bailout bonanza cut off when the market for Treasuries dries up; All hell will break loose at this point

Sunny sentiment, huh?

It's ugly. It is real ugly. It reminds me when in 2000 the sudden realization that fiber optic lines were not going to return trillions in dollars of revenue for tech firms. Or that Cisco giving money to firms they sold stuff to so those firms could pay Cisco maybe was not so great a business idea. When the Tech Wreck happened, many pie in the sky dreams died with it. They simply ceased to exist.

Now try to imagine the same kind of total repudiation as the Tech Boom had, only for all things banking, investing, insurance, and lending and you can get an idea what I mean.

We are coming to a point where there will simply be no more tolerance for things that do not exist in the real world. It will be put up or shut up time. What this means for a country like the USA that must borrow for everyday operation is hard to know, but surely will not be much fun.

Rereading this post I really feel that it is not expressing what I really want it too. I am not able to fully translate into words the picture I have in my head of all this stuff. Leave some comments and let me know what you think.

Have a good night.