Stop all the clocks, cut off the telephone, prevent the dog from barking with a juicy bone, silence the pianos, and let the aeroplanes circle moaning overhead. Then read this article by Martin Sibileau:
(Here’s the PDF version.)
Yes, it is an exceedingly technical article, and I would point-blank refuse to sit a 2-hour examination paper based upon it. However, if you wrap a wet towel around you’re head long enough the article makes sense, particularly its last paragraph, and especially its last line:
“Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. This occurred in two steps: First at a global level, with the irredeemability of gold: The world could no longer devalue. Second, at a local and inter-temporal level, with zero interest rates: Countries can no longer produce consumption adjustments. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation.“
As they say in cheap novels, you have been warned.