I wrote a while back that (unlike some others) I didn’t believe it was likely that  this was going to be a cataclysmic rate spike. Readers who want to detect one need to watch whether sovereign creditors especially Russia and China are selling, and at what pace — the faster the liquidation, the more rates may spike.
 

Of course, I am still convinced that the real fragility to America’s economy isn’t actually a rate spike or inflation.The Fed has a very good handle on both of these things (but not, of course — as is always the case with central planning — on unwanted side effects. They can effectively do QE (and monetise debt) without really inflating the currency much; simply shoot the money to primary dealers for treasuries, and pay the primary dealers interest on excess reserves so that very little of the money gets lent out, thus inflating the currency.
 

Benny the great and wise central planner thinks he has suppressed the volatility. But as I mention above (and as Taleb more eloquently puts it in his forthcoming volume Antifragile) when volatility is artificially suppressed, there are always unwanted side effects. And that — the unwanted side effects, not the widely-reported fears of inflation and rate spikes — I believe, is the true danger.
 

One unwanted side effect could be provoking a damaging and  trade war with China, from which the West imports so much. That is my pet theory, and one I’ve devoted a few thousand words to over the last few months. But the trouble with side-effects is that sometimes it is very hard to tell what the weakest link (i.e. the point that will break) in a volatility-suppressed system is. Tyler Durden reports that systemic financial fragility (as measured by CDS) is at a recent-high, too:

 

Believers in technical analysis (I am quite sceptical) are pointing to a head-and-shoulders top in the “recovery” (to go with the bigger head and shoulders top that is very much one of the stories of the last ten years):

 

I don’t know when the black swans will come home to roost and the strange creature that we call the present global economic order will go ka-put. But I see the fragilities caused by central planners suppressing the system’s natural volatility and order, and I see the growing potential for disastrous side-effects.


This article first appeared in the John Aziz' blog.