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CHAPTER 23 Managing the Water Balloon

The world of finance is the sum total of Earth’s capital resources and can be both measured and observed as liquidity inside an earthly balloon.

Within a water balloon, each and every push on the balloon has consequences that generate an equal and opposite reaction somewhere else on the balloon’s surface. When consequences fail to appear, or appear unequally, there is a need to dig deeper.

Prior to every financial crisis in world history, investors became convinced (through ignorance or deceit) that vast sums of new liquidity had somehow burst into existence without negative consequence (or as irrational exuberance with indefinite consequence). During the years leading up to the crisis of 2007–2009, people with great financial expertise (e.g., Alan Greenspan) were lulled into complacency as the world expanded a $67 trillion bubble through fraudulent off-balance sheet liabilities and shadow banking until that bubble burst with horrific consequences that may continue to restrain essential growth for a sustained period into the future.

It is safe to assume that any period during which spreads are sustained at a level of equilibrium that is near or below the complete-market range requires further examination (see, again, Charts 9.1, 9.2, and 9.3). When no logical explanation exists for this phenomenon (for example, a level playing field on which entities with no government support actively and transparently maintain equilibrium by trading risk-free ...