Plan B

In the last liquidity crisis of 2008 the US Federal Reserve bailed out practically the whole world, printing out tens of trillions of US dollars in swap guarantees, thereby guaranteeing every bank deposit in the US and propping up the system for the elites, those high up the food chain. Other Central banks around the world followed suit carrying out their own massive bond buying with the aim of keeping interest rates low and stimulating investment. Some of the liquidity pumped into the system found its way onto the stock, property, and bond markets which spurred a rally in emerging currencies brought on by carry trade investments. It is most likely that this lengthy period of low interest rates may have been directly responsible for artificially inflating asset prices and creating yet another asset bubble. The extent to which this has occurred remains to be seen. Furthermore, the era of cheap money may have been the culprit for encouraging reckless investing and distorting investors' perception of risk. When Greek bonds return to the market and investors where applauding yields of around six percent, this underscores the above point. The Greek economy is a basket case, where the risk of credit default is high and investors are unlikely to recover their money. Just recently, in June, Greece had become the first developed country to be downgraded to emerging market status by the index provider MSCI. Nevertheless, in a climate of low interest rates where getting a good return of capital is challenging, some investors were drawn to the prospects of investing in Greek bonds. In Wall St speak, investors are “picking up nickels in front of a steamroller.” In other words, investors are taking on board excessive risks for small gains. The extent of excessive risk taking by investors, which has been aided and abetted by cheap money also remains to be seen.

But let's take the bearish view and imagine that we are on the verge of a big asset bubble that is about to burst in equities, bonds and real estate. Furthermore,the excessive risk taking fuelled by cheap money has lured investors into risky sovereign debt. What would then happen if the high risk sovereign debt market in the peripheral states of the euro bloc imploded, leaving many investors burnt? Well, it would probably make the sub-prime credit crisis of 2008 look like a picnic.

What would the central bankers do then? We know that the central banks can print more money. In fact they don't even need to print it on paper, with a few taps on a keyboard they can draft up credit SWAP guarantees and buy up billions, or trillions, of risky debt, freeing up the banks to lend thereby pumping the system with liquidity. That’s the theory of quantitative easing, but in reality the banks aren't playing ball. So where has all that liquidity gone?

"It all got bottled up in the banks, and essentially none of it ... got lent out," according to an independent analyst, Blinder.

"You can think of these as the deposits that banks hold at the Federal Reserve, which is a bank for them," added Blinder. But when the banks don't lend those deposits, or invest them, they don't get into the economy. So the funds don't then enter the money supply and Wboost to the economy, or contribute to inflation. This may in part explain why monetary policy isn't working.

Bearing that in mind, it is unlikely the central banks would follow the same path again in the next crisis. The rationale being that they would lose the most important thing that backs any fiat currency, trust and credibility. Fiat currency has value because investors trust it as a store of value. The moment trust is eroded the whole system comes crashing down like a pack of cards.

In the worst case scenario the monetary authorities have a plan B, which is available on the International Monetary Fund (IMF) website for all to see. The plan was first published on the IMF website in 2011. In short it is a 10 year plan to make the SDRs (Special Drawing Rights) the global reserve currency. There is nothing new about the idea of a global reserve currency. The idea was conceived back in 1969 and has been issued already on several occasions. Just like we saw back in 2009 the Federal Reserve has a printing press and can print dollars, likewise the European Central Bank is in the same position with regards to Euros. Additionally, the IMF too can print SDR, which are not backed by anything, but if they did so it would be highly inflationary.

In the last liquidity crisis the Fed bailed out the whole world, printing tens of trillions of dollars in SWAP guarantees, guaranteeing every bank deposit in America and propping up the system. The problem now is that the FED has already fired its rounds in the last crisis, they are tapped out. Some analysts reckon that the next crisis coming is going to be bigger than the FED. In other words, the FED will not be able to go to 8 trillion on their balance sheet because it might this time destroy confidence. So where is the liquidity going to come from?

It is going to come from IMF in the form of SDRs, reckons James Rickards an industry insider turned whistle-blower.

But that could mean hyperinflation.