No one wants to see the sky falling(by smokey)

No one wants to see the sky falling.

Either they are afraid that clouds will come falling down on their parade.

Or...

They are so numbed by the "sky is falling" prognosticators that they stop looking up.

Theproblem with refusing to look up, is that perception is then limited towhat man has done to keep the sky from falling when the sky was notreally falling. One cloud here and there was prevented from messing upsomeone's suit.

The Fed up to now, has met small disruptions inthe credit system with large infusions of credit which have createdhuge asset bubbles thereby exponentially multiplying these largeinfusions of credit well beyond the Fed's original intentions.

Weimar hyperinflation has occurred within our own financial system.

InWeimar Germany the constant multiplication of Marks drove prices farbeyond the government's ability to multiply the Marks. The perceivedvalue of the currency relentlessly depreciated compared to the assetsand commodities bought with the currency. This appreciation in thevalue of assets and commodities accelerated on its own.

How is this different from what has been occurring in the financial markets for the past ten years?

Holdingdollars has become so averse that hundreds of financial tools have beencreated to try to make the dollars worth more and more and more. Butall these tools have done is to exponentially multiply the dollars bycreating more and more and more asset bubbles.

In Weimar Germanythe multiplication of the currency became so surreal that folks beganusing Marks for toilet paper and kindling.

This is where the analogy flips upside down.

The Weimar government actually printed Marks and distributed them to not only the employed, but also the unemployed.

Themultiplication of dollars in our financial system has not occurredthrough printing and distribution, but through credit. Every dollar inour system has been borrowed with interest attached. Hyperinflatingassets are bought with borrowed dollars using the hyperinflating assetsas collateral.

As long as enough assets keep hyperinflating, thesudden collapse in a few assets can be overcome by making dollarscheaper. The 0% real Fed funds rate target of '02-'04 and the current0% yen carry trade have been able to sustain asset hyperinflation inthe financial system.

The few clouds that fell did not destroy the system.

Howeverat this point, the surreality of the financial assets themselves arebecoming obvious much as the surreality of the Weimar currency becameclear.

And just as a wheelbarrow full of Marks became worthless than a loaf of bread, a wheelbarrow full of CDO's are becomingworth less than a loaf of dollars.

There are now many entitiesin the financial system that are holding fleets of wheelbarrows full ofdepreciating assets which they have bought with borrowed dollars. Whenthose assets were appreciating they could always borrow more dollars tobuy more assets or they could sell those assets for a profit to obtaindollars when necessary.

The Fed has been working in thisenvironment of appreciating assets up to now. All their machinations tosave this financial entity or that financial entity have worked becauseof the expanding financial environment.

But now the financialenvironment is contracting. The sky is darkening and getting very, veryheavy. The same machinations are not working.

A little acorn fell on Chicken Little's head and she thought the sky was falling.

The whole damn sky is falling on our financial system and most folks think it's a little acorn.