The basis trade
Excerpts:
The global government finance Bubble dwarfs all previous Bubbles. Insatiable demand for perceived safe government debt and central bank Credit has allowed this Bubble to inflate for more than 15 years. Years of massive deficit spending ensure deeply systemic economic maladjustment. Endemic deficit spending has inflated incomes and corporate profits, in the process working to inflate historic securities, housing and other asset market Bubbles.
The current Bubble has been inflating for so long that Bubble analysis is easily dismissed. Yet it is important to appreciate that the “basis trade” is the ultimate “terminal phase” government finance Bubble manifestation. Only in the perceived safest and most liquid money-like government debt instruments would it be possible to operate at 50 to 100 times leverage. Only after years of recurring Federal Reserve market interventions, open-ended (i.e., $5 TN) liquidity injections and bailouts would speculators attain the confidence level necessary to accumulate egregious amounts of speculative leverage.