Financial Feudalism

Submitted by Dmirty Orlov via Club Orlov blog,

Once upon a time—and a fairly long time it was—most of the thickly settled parts of the world had something called feudalism. It was a way of organizing society hierarchically. Typically, at the very top there was a sovereign (king, prince, emperor, pharaoh, along with some high priests). Below the sovereign were several ranks of noblemen, with hereditary titles. Below the noblemen were commoners, who likewise inherited their stations in life, be it by being bound to a piece of land upon which they toiled, or by being granted the right to engage in a certain type of production or trade, in case of craftsmen and merchants. Everybody was locked into position through permanent relationships of allegiance, tribute and customary duties: tribute and customary duties flowed up through the ranks, while favors, privileges and protection flowed down.

It was a remarkably resilient, self-perpetuating system, based largely on the use of land and other renewable resources, all ultimately powered by sunlight. Wealth was primarily derived from land and the various uses of land. Here is a simplified org chart showing the pecking order of a medieval society.

“Profound Shift In Liquidity Risk” May Imperil Market Function, New Report Says

Over the past several weeks we’ve said quite a bit about the lack of liquidity in both corporate and government bond markets. In a nutshell, QE is taking its toll on Treasury and JGB markets, with both traders and officials in Japan voicing concerns about liquidity while new regulations have made it more onerous for banks to hold inventories of corporate bonds, imperiling the secondary market at a time when new issuance is high thanks to record low borrowing costs. Here’s more:

Illiquid Corporate Bond Market Will End In “Very Unpleasant Fashion” Drowning In Liquidity But None In The Bond Market More Flash Crashes To Come As Shadow Banking Liquidity Collapses BoJ Conducts Survey, Promptly Ignores Results

Now, Oliver Wyman and Morgan Stanley are out with a new report that takes an in depth look at the issue.

From the note, on market conditions in general…

There’s a liquidity conundrum in fixed income markets facing policy makers and investors: how it’s resolved will have long term investment implications across banks, asset managers and infrastructure players.