Credit Default Swaps Are Unveiled

Since the waterfall effect created in the stock markets in October of 2008, I have remained wary of the lack of visibility of the credit default swap (CDS) market. This is another 800 pound gorilla in the room, and I am concerned that I cannot see any sign of it. These derivative securities were a major influence in how rapidly stock and bond prices shed value and I cannot forget that. Companies (primarily the foreign and domestic 'too big to fail' entities) that used them for protection suddenly found they were unprotected and suffered large, unexpected losses, repeatedly. Thanks to a swift accounting rule change and federal bailouts to cover realized losses and build up reserves for future losses, their losses were only temporary stock price declines that have almost completely recovered. This may have something to do with their complexity. But their complexity has not prevented Ron Hera from taking on the investigative task and having his article published on Financial Sense. Hera has written what I think is the best review of the CDS world I have found and I want to refer to it in the future. Here is the link to "OTC Derivatives: Failed Banks or Failed Nations?"

Observations on Bernanke's Dilemma: Hyperinflation and the US$

I am having a little trouble accepting one important message in an earlier article, Bernanke's Dilemma: Hyperinflation and the US Dollar, written by Ron Hera, describing his perspective on the economic course we are on. It is an excellent article, a must read. For me, one of his core beliefs is that if "the credibility of a government, or of its central bank, breaks down, the recognition of this fact is expressed as a race to shed the currency and to divest of the government’s bonds. One way to evaluate the possibility of hyperinflation is therefore to gauge the transparency, completeness and veracity of government and central bank statements regarding their balance sheets, budgets and bond issues."

Bernanke’s Dilemma: Hyperinflation and the US Dollar

Here is an analysis of the questions surrounding the existing condition of the US government as it struggles to save its legitimacy, that is, restore trust in it as a governing body. Then there are the questions surrounding the Keynesian policies of quantitative easing and the consequences of issued government debt hitting near 90% of GDP. Pile on top of that, the commitments for additional debt that have not been financed but must be, along with the total of private debt, yours and mine, and now we have debt to GDP approaching 300%! No wonder Ron Hera has done a great deal of research on the questions facing Bernanke, and the rest of us. Read this.
Bernanke’s Dilemma: Hyperinflation and the US Dollar

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