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Nov 30 2011

Less than it seems.

No doubt by now you’ve seen the markets soaring on the basis of the announcements that the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank, and the Federal Reserve are co-ordinating a big liquidity operation.

It’s been hard to sort out reputable (as in not constantly wrong) economic thought on this development, for the most part commentators are shills who’s job is to tease out more ‘sucker’ money for the Ponzi scheme and it’s important to remember that Mr. Market is an ignorant gambler who bets on momentum changes and thinks that because the flip came up heads this time it will always do the same and merely guarantees losses by hedging that bet by putting the same amount on tails.

Felix Salmon has an instructive analysis I’ll attempt to summarize.

This is a liquidity fix, not an insolvency fix.  The problem it’s intended to address is that banks will no longer lend to other banks because they suspect (and rightly so) that the other banks’ assets are pieces of crap.

It does nothing at all to address the fact that those assets are pieces of crap.

It’s also not as co-ordinated as it first appears.  Canada, Japan, and the Fed make no current commitments, they simply agree in principle that something should be done sometime, eventually.

So Mr. Market is desperate for anything that seems like good news and like all the other “solutions” this will provide a momentary selling opportunity.

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