The End of the World Only Comes Once And You Can't Make Any Money Off of It
There is one major difference between subprime and sovereign debt which is that Wall Street has not found a way to make money off of sovereign debt. That only amplifies the ignorance factor, because instead of just oblivious academics and clueless journalists, you can now add preoccupied speculators who are more focused on picking a spot to buy Apple.
Steering the Titanic Through An Ice Field At Full Speed
The one cohort who are dialed in to this risk of course, are global Central Bankers who are the only reason a sovereign default has not already occurred. The U.S., ECB, Canada, Japan, U.K. have all been monetizing debt to keep the credit markets operating. These interventions also keep speculators at bay. So the key question on the table at this juncture is how long can Central Banks continue to fund insolvent governments and overall how long can this paradigm last. In Japan, debt monetizations have gone on there for close to twenty years, so that is the most common example cited for assuming that deficits still don't matter. Then of course there is the hyperinflation camp who assume this will go on until the money supply gets so massive that it leads to out of control inflation. I've already addressed that gold-sponsored fantasy multiple times. This money is clearly not making its way into the real economy and the hands of consumers. It's not intended for the middle class, it's intended for the Romney class only. When I get a pack of Ben Franklins in the mail from Uncle Sam, then I will get worried about inflation. Which gets us down to the key drivers that will lead us to the inevitable Minsky moment. Despite their grandest efforts, Central Banks still only control a few trillion dollars across the entire capital asset markets, which are valued north of $200 trillion. Think about that, they are trying to herd a pack of elephants using a border collie. Sure it all works great when the elephants are orderly, but not so well in a stampede. The same analogy applies in this situation - Central Banks are attempting to control $200 trillion of assets using marginal purchases of a very small segment of the entire credit markets. As long as risk appetite is in the "risk on" mode, which it has been for most of four years straight, this strategy will work. When risk appetite inevitably turns back to risk "off" mode - whether due to the deteriorating global economy, a geopolitical event, a credit default etc. etc. then the resulting stampede out of risk assets will overwhelm Central Banks' efforts to control the markets. It's as simple as that. However, unlike 2008, it's going to take a hell of a lot more people by surprise.