Debt is secured by collateral, but in a financial system unmoored from discipline, which has been the case for decades, debt creation has ballooned, with the same collateral often being pledged multiple times to back multiple loans. In the City of London, it’s legal to infinitely rehypothecate your collateral, meaning to back an infinite number of loans with it. So long as the loans don’t go bad, requiring the handover of the collateral, the system continues blithly unaware of the systemic risk. But loans can go bad all at once and very quickly when confidence is lost. The current financial risk awakening is beginning to reveal a huge shortage of collateral, beginning in the unregulated private credit market. This is a game of musical chairs, with less than one chair per person ‘playing the game’. The music is stopping. Either the great collateral grab begins now, or the system finds a way to expand collateral through tokenisation of assets, making illiquid assets liquid so they can serve the debt ponzi. This could kick the can down the road a little longer if they succeed, although at massive cost to ordinary people who will be asset stripped. It’s critical to understand what’s happening in the financial system in order to have a chance to avoid this outcome.
by Nicole Foss
