Thursday, August 16, 2007

Central Bankers take toys and go home

If you don't have children peer back in your memory and try to recall a time when a group of you were playing a game. Then when the game wasn't progressing the way one child, who happened to own the toys, wanted, he upends the game board, or simply takes the toys away and leaves.

If you have children you most likely see this from time to time.

Watching the gold market trade the past few days, I get the same sense. It is as if a group of guys decided that if we don't play by their rules, they will destroy the game for all. The global financial system becomes Hotel California, you can check out any time you like, but you can never leave.

When did finance become an all-or-nothing proposition? When Central Banks took the place of a gold standard. Prior to that time, gold was the preferred place to store value during imbalance resolution phases. Now, we are all, apparently, stuck on the Titanic and all warning bells have been disconnected.

Heck, even Dennis Gartman sees things that way, although he views the policy with agreement.

But this policy has consequences, most notably, it transforms risk into Knightian uncertainty- a transformation I will explain in my next post.


Jamie said...

The bid seems to have disappeared for many credit "products".
How does this compare to your days in SE Asia?

Dude said...

During the Asian crisis, currency prices for any size were hard to come by once the bottom fell out, much less prices for interest rate products.

As a dealer, one of the worst things to hear when you need to cut your losses is "price out....looking."