Charles Hugh Smith on The Big Lie

We are being throttled by the Big Lie: we're told that if the predatory financial system implodes, we'll all be ruined. The opposite is true: the only way to save our economy is to let the corrupt, pathological and flawed financial system implode 

I was recently challenged by a contributor to write something positive, and so I decided to write about the single most positive outcome of the current financial crisis in Europe: the complete collapse of the corrupt, predatory, pathological global banking sector and its dealers, the central banks. Exploring why this is so reveals the insurmountable internal conflicts in our current financial system, and also illuminates the systemic political propaganda which is deployed daily to prop up a parasitic, corrupting, pathologically destructive financial system.

 Our first stop is modern finance itself. Modern financial "products" and "instruments" are often highly complex and abstract, but the entire edifice can be distilled down to this: the system is based on the assumption that all risk can be hedged, and the difference between the initial position's yield/gain (i.. e. placement of capital at risk for a gain) and the cost of hedging the risk of the wager to zero can be skimmed from the system risk-free.

That is the entire system in a nutshell, and we can immediately see the advantages of this system over traditional Capitalism, where risk can be hedged but never to zero, and the return is correlated to the risk taken on.

In modern finance, high-risk "investments" (wagers) with high returns can be taken on without worry because any and all risk can be hedged to zero, even in super high-risk wagers.

And since even high-risk positions can be seamlessly hedged to zero, then there is no reason not to borrow money to increase the size of your wagers: since you can't lose, then why not? Wagering in risk-free skimming with borrowed or leveraged money is simply rational.

Put these together and we see how a system based on risk-free skimming eventually leverages itself to the point that the slightest disruption can bring down the entire over-leveraged, over-extended system. 

Why is this so? Every hedge has a counterparty who is supposed to pay off if the initial wager blows up. A system based on risk-free hedging is ultimately a self-organizing system which maximizes return by increasing bet sizes, leveraging/borrowing to near infinity and hedging every hedge as well as every wager..... [emphasis added]

Read the rest at Of Two MInds, The Collapse of Our Corrupt, Predatory, Pathological Financial System Is Necessary and Positive 

Obviously, this is not "capitalism" in any classical definition of the term, which includes assumption of risk in proportion to expectation of reward. In other words, "there ain't no such thing as a free lunch."

While he doesn't call it "rent-seeking," Charles Hugh Smith as boldly articulated the Ponzi phase of a long financial cycle that has culminated in extraction of economic rent at the expense of generating such great systemic risk that governments cannot let those responsible fail. Couple this with widespread fraud and loose practices, and go figure. The result has been a catastrophe that so far as been delayed and mitigated (for those at the top) through unprecedented forbearance ("extend and pretend") by regulators and virtually unlimited liquidity provision by central banks.

While this could go on "forever" in principle, it cannot in practice because to shore up the system meanwhile, economic austerity is being required of the public in most developed countries, where expectations traditional run high. This is resulting in social unrest on an increasing scale.

"Expansionary fiscal austerity" is an oxymoron that only morons would buy into, so the handwriting is on the wall. Under present leadership, this ship is sailing into a whirlpool, and the downward spiral has begun.