Monday, May 10, 2010

Stabilizing Markets In The Near Term and The Ever Lasting Gobstopper

Stabilizing markets in the near term. That phrase almost has a comforting effect on the soul when spoken. Unless you look closely at what is being proposed to accomplish the task stabilizing those markets. For us here in America, it meant the creation of a giant rescue umbrella in the fall of 2008. 767 billion dollars or some such and an equal amount and more once the Obama administration had hold of the reins of American government. But what has actually been accomplished in the two years since the sub prime mortgage collapse?

Obama is still searching for his everlasting gobstopper, but I don't think that he will find one.

Unemployment is still running at 10% and above that figure in many places across the country and the light at the end of the tunnel remains a faint flicker at best. And that faint flicker (we are constantly reminded) is always only a breath away from being extinguished. Which brings me to the two points I want to make.

Firstly the European Union debt crisis, presently focused on the Greeks and equally over shadowing the Spanish, the Portuguese and the Irish? Each of those economies is teetering toward falling into the great abyss of complete collapse. And the reason that they are so close to oblivion? They don't have the luxury of either America or Great Britain when it comes to sovereign currencies. They all opted to depart from their currencies and they cashed in on the Euro right after they joined the European Union.

So Now? They don't have the luxury of printing their own fiat money like America and the UK do. They are stuck like the rest of us underlings in the real world. If it isn't in their bank account? Then they don't have it. And right now? They don't have it.

It reminds me of the old saw of "keeping up with the Jones." This is precisely what these member countries of the EU apparently thought that they could pull off. They thought that they could engage in the same waste and opulence that America and their rich cousins in the UK were getting away with. Never dreaming that once you spend all this money on credit, at some point you have to begin making the payments.

It reminds me of another old axiom....."some people don't want to be rich, they just want to look rich." Well it looks like the Greeks and a few others in Europe opted for the looking rich at the expense of putting off paying their bills and their never ending entitlement obligations that they were amassing along the way. And Now? The bill is due.

I could link any number of current stories to my musings, but those who are familiar with current events know all to well what the problems are. Or at least they have seen and read the reports coming out of Europe the past few weeks. But there is a far worse harbinger of doom about to break upon the shores of America and Europe. And that Harbinger of doom is a little known and even less understood financial mechanism called derivatives.

IMO, it would take at least four years of invested time at a major post graduate institution, to even begin to either understand or explain derivatives, but let's just say 'they are bad.' Derivatives are the financial markets equivalent to dark matter IMO. They are a force that rivals any nuclear comparison if (when) they come to rest in our present day reality.

Right now, derivatives and gaming pieces on the big boards of finance globally. Little understood, but played wildly just the same. It's the financial realm version of the Monte Carlo crap game. You can win big and lose terribly and no one will be able to explain to you what happened either way.

George Soros knows about the derivatives markets. He has made billions betting on them and in essence betting against America. And presently, the derivatives markets have grown forty percent in the past two years. Something along the lines of over 450 trillion dollars is now floating over our heads in digitalized derivatives trading.

Think about that scene in the classic film Willy Wonka and the Chocolate Factory. When Gene Wilder is explaining his version of "Wonkavision." That analogy is perfect for visualizing this mess if you ask me, because what stands to happen to currencies and entire economies globally, is that they will enter the derivatives market on the one end? And come out significantly smaller if not non existent on the other end+. And somewhere in the middle, is where the proverbial middle men of finance will take their profits and leave. Before the rest of us are left with the end product and holding the bag.

Go ahead. Read up on derivatives. If derivatives don't make your head hurt just trying to understand them? I don't know what will. But worse than that, they stand to make your life miserable in the near term.

There is that term again. So enjoy it. In the near term, most of us will remain oblivious and in the near term, life will remain copacetic. But in the long term? We are all headed down Alice's rabbit hole. And soon IMO.

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