The Leverage Bomb

To understand our present crisis we need to examine two things:

Firstly, risk.

The following definition of risk show the true scope of this quantifiable phenomenon:

1. General: Probability or threat of a damage, injury, liability, loss, or other negative occurrence, caused by external or internal vulnerabilities, and which may be neutralized through pre-mediated action.

2. Finance: Probability that an actual return on an investment will be lower than the expected return. Financial risk is divided into the following general categories:
(1) Basis risk: Changes in interest rates will cause interest-bearing liabilities (deposits) to reprice at a rate higher than that of the interest-bearing assets (loans).
(2) Capital risk: Losses from un-recovered loans will affect the financial institution's capital base and may necessitate floating of a new stock (share) issue.
(3) Country risk: Economic and political changes in a foreign country will affect loan-repayments from debtors.
(4) Default risk: Borrowers will not be able to repay principal and interest as arranged (also called credit risk).
(5) Delivery risk: Buyer or seller of a financial instrument or foreign currency will not be able to meet associated delivery obligations on their maturity.
(6) Economic risk: Changes in the state of economy will impair the debtors' ability to pay or the potential borrower's ability to borrow.
(7) Exchange rate risk: Appreciation or depreciation of a currency will result in a loss or an naked-position.
(8) Interest rate risk: Decline in net interest income will result from changes in relationship between interest income and interest expense.
(9) Liquidity risk: There will not be enough cash and/or cash-equivalents to meet the needs of depositors and borrowers.
(10) Operations risk: Failure of data processing equipment will prevent the bank from maintaining its critical operations to the customers' satisfaction.
(11) Payment system risk: Payment system of a major bank will malfunction and will hinder its payments.
(12) Political risk: Political changes in a debtor's country will jeopardize debt-service payments.
(13) Refinancing risk: It will not be possible to refinance maturing liabilities (deposits) when they fall due, at economic cost and terms.
(14) Reinvestment risk: It will not be possible to reinvest interest-earning assets (loans) at current market rates.
(15) Settlement risk: Failure of a major bank will result in a chain-reaction reducing other banks' ability to honor payment commitments.
(16) Sovereign risk: Local or foreign debtor-government will refuse to honor its debt obligations on their due date.
(17) Underwriting risk: New issue of securities underwritten by the institution will not be sold or its market price will drop.

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Secondly, Uncertainty:

Uncertainty is defined differently since it is non-quantifiable:

1. Decision making: Situation where the current state of knowledge is such that
(1) the order or nature of things is unknown,
(2) the consequences, extent, or magnitude of circumstances, conditions, or events is unpredictable, and
(3) credible probabilities to possible outcomes cannot be assigned. Although too much uncertainty is undesirable, manageable uncertainty provides the freedom to make creative decisions.
See also risk.

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I am emphasizing the difference between these to phenomena since the massive leverage we see in the banking system combined with enormous, growing, sovereign debt, and the existence of world wide fiat currencies are combining to create the biggest leverage bomb the world has ever seen.
Risks can be managed to a certain degree, but uncertainty is difficult to control. With risks and uncertainties building, the consequences and magnitude of a rapid unraveling of debt become extremely severe.
A reference to physics may be appropriate, as the likelihood of a destructive Schrodinger Wave continues to increase as the gold to bond ratio continues to climb.