Money Money Everywhere

Developed market central bank balance sheets are growing and monetary voodoo facilities are doing brisk business. Google shows over 18,000 news stories for "liquidity" and LTRO was trending. Most discussions of borrowing  focus on the exorbitant amounts sloshing around. When looked at across the spectrum of funding sources, the topic should clearly be the cost. More directly, the cost for what participant.

As we have argued throughout the year, this is a classic Structural Trap. A standard response is to classify this as a Keynesian Liquidity Trap. Large monetary injections and near zero rates do not result in economic response. However, when the liquidity wave is directed to broken and structurally impaired industries, rather than productive and new technologies, you are in a Structural Trap. The unique characteristic of this condition in the US, UK and EZ is that industry is banking.

The problem in the system is not liquidity. The problem is that the flood is all being directed to live support on the heart of the last debacle. When looked at across available facilities, additional small adjustments can be tweaked. Outside of the banks, the situation remains near comatose on both the demand and supply side. Austerity embeds the structural trap even deeper. 2011 was the  "Stability"  objective year and policy brought ridiculous volatility to markets. 2012 will find stability in the worst possible configuration, exhaustion. Structural traps fatigue the spirit of economic advance. The surprise event of 2012 is not tail risk (as options now show heavily bet)- the surprise is dead calm.

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