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12/26/09..PPOT

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The joke is on anyone who thinks they have the slightest control over anything.

With regards to events there is an illusion that things are under control..most of the time events fall within a range that gives the illusion of control, then an extraordinary event or series of events can skew that illusion. It is at that time that fear sets in and men panic.

This is what happened in the fall of 2008. Two factors set men to panic at that time

1. The fall of Lehman, which was the culmination of events starting with the Sub-prime, Bear Sterns etc. This series of events were almost linear in nature.

2. The House voting down the first vote of TARP

The voting down of TARP showed that the resort of last refuge being the full faith of the US govt was not going to rectify a dire situation. That failure to act set into motion a panic as everybody realized that events were out of control and nobody knew where the domino's would stop falling. So everybody wanted OUT.

Further men make decisions based upon the best information or perception there of that they have at the time. At a later time they may find that their information was incomplete and events may take a course that is unintended.

So we come to the situation we have today, one year later. If one looks about one finds that there are many respected analysts/investors that are warning of dire consequences for the policies that the US govt has set into motion.

These policies are:

1. The US is currently at 80% of GDP debt levels and is set to go to over 100% in the medium term future with its deficit spending. The long held theory is that one spends its way out of recession. However this is a faulty assumption as what got the world into this mess is leverage. So more leverage in the long run only compounds the mess.

1A. Also this long held theory states that in a crisis of liquidity the way out is to create so much liquidity that things have to start moving once again. However once again the laws of unintended consequences rears its head because it weakens an already weakened currency, which makes a tottering situation even more precarious, one might call this Catch 22.

To this end the US govt is printing money to to cover the shortfall in its ability to sell more debt. This in the long run will debase the currency. The US is not alone in its heavily leveraged position as Iceland, Ireland, Spain, Greece, UK, Dubai and Japan are also very heavily leveraged.

2. The current political leadership of the US is bound and determined to enact policies that they have been selling as heading off a crisis of HC in the future. However the foreseeable outcome of these policies have a very plain to see unintended consequence of stifling the very thing that is needed to help recover from the situation we find ourselves in, of having too much leverage.

3. The very fact that the US govt is trying to spend its way out of a recession/depression while being heavily leveraged in the first place means that its where with all in any coming crisis will be limited. They are simply using what ammunition they have left in the bank and will not be able to pull the same trick twice.

However while virtually everyone knows that the ultimate outcome of these policies are unsustainable and sooner or later will result in another crisis, no one knows what the event will be that will set the crisis in motion. One thing can be surmised is that it will be something that can be considered to be minor. Something that no one would expect to lead to a cataclysm

Since the issue is having a large amount of leverage one would think that the event that would set into motion the next crisis would be a leverage issue. To that end the default on a Bond Issue by perhaps a state such as California, NY, MI, or a large American city such as NY would be the precipitating event. Another possibility is that a Bond auction by a STATE/CITY or the Federal govt finds few investors willing to take the risk. The corollary to having few investors willing to take a risk is that the precipitating event would be that the Bonds of a state etc on the secondary market might one day become illiquid. This would then set events in motion which would start the domino's to falling.