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The Power of Governments to Support Financial Markets - Tim Iacono - Iacono Research

The reality is that governments and central banks have only a limited power to support markets. The ability to do so rests entirely upon having a functioning bond market. When the sole entity buying your debt is your central bank, that ability vanishes in the blink of an eye.

To answer your question of who bails out the governments and central banks when things go awry, the answer varies, depending upon the size of the debt. If we are talking some pissant country, it would be the IMF if the nation in question is willing to accept the terms of the loan. If we are talking about a major economy, history teaches us that the nation declares bankruptcy, a new currency is created and all the old debts are either payed off pennies on the dollar, or the nation repudiates all past debt and starts over again with a clean slate. The second option will lead to having foreign assets seized and it will likely take some time before others are willing to lend you money again, but that is the worst of it.

With regard the declaring bankruptcy option, it has often been that the nation doing so reconstitutes itself as a different entity (system of government, constitution, bill of rights and legal code) and brings up on charges those who oversaw the destruction of the old country. It will be what happens in America when their bond market finally collapses some years from now. In the case of America, they will have to build a whole lot of new jails to accomodate the guilty.

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Beginning of the headline :The views expressed by Izabella Kaminska in this FT Alphaville commentary go a long way in explaining why asset markets (with the notable exception of safe havens) seem to be unstoppable these days. Consider, for example, the views professed by Duquesne Capital Founder, Stanley Druckenmiller, in a recent Bloomberg interview. Not only did he outline that equity was anything but cheap, he claimed the current course of equity markets was heading towards another equity bubble — so anything but a sa... Read More

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