Gobbled up by the derivatives monster
By The Mogambo Guru
Clive Maund at clivemaund.com says, "Payback time for Wall St and Washington
will be when foreign investors fail to turn up at the bond auctions to finance
the bailout plan, whose US$800+ billion will have to be created out of thin
air. So the bonds will have to be monetized, which will mean an immediate spike
in inflation, which will cause the rate of corporate bankruptcies to soar as
failing companies take down others in a chain reaction because the losses will
be highly leveraged by credit default swaps etc. This is the underlying reason
why banks won't lend to each other - they can't calculate the counterparty
risk. All of this will set off a massive derivatives meltdown that will bring
the whole system crashing down."
Well, I say that these foreigners will turn up to loan us money as
long as we have weapons, technology, land and useful assets to sell them, but
the time will soon come when they will be peddling them to us. In the meantime,
how big is the derivatives monster that is going to destroy the world's
economic system?
Well, the estimate from (as I recall) the International Monetary Fund is that
the global total of derivative contracts outstanding is $1.125 quadrillion,
whereas global gross domestic product is about $50 trillion, although both
numbers are so big that I couldn't make any sense of them even if I was sober,
and being sloshed, I revert to more primitive responses, like screaming in fear
and holing up behind the massive blast-proof door of the Mogambo Bunker Of
Raging Panic (MBORP).
Only here, safe amongst gold, silver, guns, frozen pizzas and stacks of adult
literature of the "Hot, Nasty Ladies" variety can I finally relax enough to
calculate that to make this $1.125 quadrillion yield even a lowly 1%, it would
take $11.25 trillion just to pay the interest! Hahaha! We're freaking doomed! A
quarter of global GDP is needed just to pay a 1% yield!
I am laughing hard at this one example of the stupidity of the American school
system that anybody in this country could possibly believe such a thing could
work! In fact, I was going to use the line "It Ain't Gonna Work", but I see
that that title had just been used by Tim Wood at FinancialSense.com, who uses
it to say "manipulation will ultimately not work" and that it will "make
matters worse in the end. Yet the Fed, the Treasury and the politicians
continue to think that they can 'fix' the problem by throwing more money at it.
They do not understand that they can't 'fix' this economic crisis. They also do
not understand that it is their trying to 'fix' things in the past that has
created the current situation."
He says that Nikolai D Kondratieff, the tragic Russian economist of the early
20th century, has foreseen all of this before, and thus, "What we are dealing
with is the wrath of Kondratieff Winter, which is about the purging of excess
credit. Along with that comes deflation, and along with that global stock
markets enter into extended declines. Real estate declines, economic growth
slows, commodities decline, bankruptcies accelerate as the excess credit is
purged from the system, the banking system is shaken, the free market is blamed
and we move toward national fascist political tendencies."
Ominously, he sums up with "We are now seeing each and every one of these
symptoms of K-wave winter."
One of the symptoms he did not mention was the intellectual corruption that
spews from the Fed, such as the recent decision of the Fed to pay banks
interest on their deposits at the Fed! Hahaha! And where in the hell will the
Fed get the money to pay all of this interest money? They will create it, too!
There is more money everywhere! Hahaha!
It's all for nothing, anyway, as Jesus Huerta de Soto starts off an essay
"Financial Crisis and Recession", posted at lewrockwell.com, with "The severe
financial crisis and resulting worldwide economic recession we have been
forecasting for years are finally unleashing their fury. In fact, the reckless
policy of artificial credit expansion that central banks (led by the American
Federal Reserve) have permitted and orchestrated over the last fifteen years
could not have ended in any other way."
And Mr de Soto ought to know, as he is as professor of economics at Rey Juan
Carlos University in Madrid, is Spain's leading Austrian economist, and the
author of the famous authoritative tome Money, Bank Credit and Economic Cycles.
In short, we're freaking doomed!
Richard Daughty is general partner and COO for Smith Consultant Group,
serving the financial and medical communities, and the editor of The Mogambo
Guru economic newsletter - an avocational exercise to heap disrespect on those
who desperately deserve it.
(Republished with permission from
The Daily Reckoning. Copyright 2008, The Daily Reckoning.)
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