When Risk Is Disconnected from Consequence, the System Itself Is at Risk
BY CHARLES HUGH SMITH
The consortium has only two ways to create the illusion of solvency when the punter’s $100 million bet goes bad: borrow $100 million from credulous possessors of capital or counterfeit it on a printing press. These are precisely the strategies being pursued by central banks and states around the globe. BUt since risk remains disconnected from gain/loss, then capital and risk both remain completely mispriced.
Risk is being transferred to the entire global financial system at a fantastic rate, because counterfeiting money or borrowing it on this scale to cover losses creates new self-reinforcing feedbacks of risk.
As long as risk is being masked or transferred to others who don’t reap the gain, they only reap the losses, then the system is doomed to self-reinforcing instability and eventual collapse.
The only solution is to enforce the causal connection between risk and consequence: those who took the risk have to absorb all the loss. Since risk cannot be eliminated, it can only be masked or transferred, then all the tricks that are being played out in Europe, China, Japan and the U.S. are only enabling risk to pile ever higher in the system itself.
At some unpredictable stick/slip point, the accumulated risk will cause the system to implode like a supernova star.