Via Golem XIV's blog,

8 years to fix the malfunctioning heart of the world’s financial and legal systems but nothing was actually done … and now the clock is ticking and there is hardly any time left.

The number of red lights now blinking at us, largely ignored by those who are supposed to be flying this thing, is growing all the time. It is not that any one of them is a clear harbinger of the end but taken together they paint a dismal and coherent picture – of a system eating itself.

What I mean is that every political and financial system, every bureaucracy, public or private is originally set up to do a necessary job. And the duty of those who work in it is to make sure the system doe that job. But when the challenges facing the system change so that the system begins to no longer be able to do its job, those in it have two choices: they can work for the greater good and help change the old system into a new one better fit to the new challenges, or they can ignore the problems, and forget the reason they and the system were created in the first place and instead seek merely to get as much as they can from the failing system before it implodes.

It seems obvious to me that is where we are today, both politically and financially. We are living in the End Times not because some angry supernatural being is coming to punish us, but because we are living in a system, a machine, which we built and therfore can change, but we have forgotten this. Some time in the recent past we crawled inside our machine, closed the last hatch to the outside behind us, and then forget there was an outside. Our leaders are the worst of us. They are the lords of the machine and they are sure outside there is only chaos. We must all save the machine. Their power and wealth demands it.

And yet they do not know how.

“Something Happened” but “Nothing appears to be breaking”

So said JPM’s chief economist Bruce Kasman. He was refering to the recent extreme ‘turbulence’ on the stock markets and the continuing drop in global market values. All I can say is that only a person who lives resolutely in a linear world, despite it being over a 100 years since we discovered that our world in not linear but non-linear, could say such a thing. In a linear world effects tend to follow their causes quickly and clearly. When things are non-linear, however, effects can surface long after and far away from their cause.

Mr Kasman, I suspect, held his breath, waited for everything to fall down and after a couple of days, when they didn’t he concluded nothing had broken after all. He looked at the on-going trend in events and saw they were much as before the inexplicable ‘turbulence’ and concluded that all was as before and the ‘turbulence’ was just ‘one of those things’.

He could be right. But I doubt it. Ours is a non-linear world and we should remember that. Think back to August 9th 2007. That was the day when BNP Paribas suddenly closed three large sub-Prime mortgage finds. The world at large had not even heard of sub-prime. To little fanfare the ECB pumped €95 billion in to the markets to steady nerves. It was not enough. The next day, August 10th The ECB pumped in another €156 billion, the FED injected $43 Billion and the BoJ a trillion Yen.

Five days later Countrywide Financial haemorrhaged 13% of it value. 16 days later Ameriquest the largest specialist sub-prime lender in the US collapsed and on September 14th there was a bank run on Norther Rock. It was a turbulent time.

And then do you know what happened? Nothing. Something had happened but nothing appeared to be broken. The linear pundits went about their crooked business. Six whole months later Bear Stearns collapsed. Its a non-linear world.

And I think we are going to be reminded … again.

ETF’s

ETF’s – have grown to the point where any prolonged large scale exit will exceed the funds available to those who control the funds and make the markets. I think they know this and some time ago those market makers and fund controllers began to boost the credit they could draw upon. Problem is the very banks they are agreeing larger credit lines with, are drawn from the same group of financial companies who make the ETF markets.

I have written about this before - ETFs – A warning which contains links to the posts in which I explain how ETFs work and why they are The Next Accident Waiting to Happen. In short the liquidity choke built in to the ETF market is that the ETF market depends very heavily on a very few financial firms who run the funds and make the markets.

We have already seen in the recent ‘turbulence’ that the ETF market is not so much liquid as fragile. When there is a scare people want out. They withdraw their money which quickly leads to zero liquidity, which leads on to forced selling and as we have already seen prices will dump to far below what the assets in the underlying market are nominally worth. Leading to an even greater pressure to get out.

The ETF market with its promise of easy withdrawal means when there is an event which spooks people and they want out it happens in seconds not days or even hours,

What it means is that this time around I think it very likely the Central Banks will have even less time than they had back in 07-09, to act before the bomb goes off. Which means in turn I expect no creative thought, only a knee-jerk reaction to do again the only things they know how to do despite the fact they have not worked.

Today it is not a bank run that will amplify some large local event in to a global wave, but a fund run.

Where might that trigger be?

* * *

The world in which and for which our old system was built is now changing around it in fundamental ways.