Stimulus will only make things worse

spend spend spend!

sober expert appraisal

It has long been true that stock markets are a good indicator of future economic outlook. They go up and down in response to the announcements of policy by politicians and central bankers.

But “derivatives” are a more recent phenomenon, and if we read them like we read stock markets, the signs all point to catastrophe. Derivatives started out as insurance policies on investments. They have turned into a form of gambling on markets.

The Wall Street Journal’s Judy Shelton recently commented:
“…..The total outstanding notional amount of financial derivatives, according to the Bank for International Settlements, is $684 trillion (as of June 2008) — over 12 times the world’s nominal gross domestic product. Derivatives make it possible to place bets on future monetary policy or exchange-rate movements. More than 66% of those financial derivatives are interest-rate contracts: swaps, options or forward-rate agreements. Another 9% are foreign-exchange contracts……”

What is the point of that amount of derivatives having been bought and sold, other than that massive gambles are being made on the worsening of the economic situation? The fees that will have been earned by the sellers of these derivatives, will be of a significant size even relative to the normal profits of financial institutions. Is this how some of those institutions have earned such sizable profits in recent years, only to fail catastrophically once they began to be required to pay out on those derivatives?

Worse, how much taxpayer “bailout” money and government guarantees are being staked against the “derivative” liability black hole?

Left wing politicians are in the ascendancy at the moment. These people combine economic ignorance and conceit; they are “rescuing us from the consequences of the failure of capitalism”. Their central bankers are no better. Central bankers are not bankers at all, they are “planners” in the worst sense of the word.

George Soros has become famous for being able to outwit the central bankers of even the world’s fourth largest economy, to enrich himself colossally at the ultimate expense of the hapless people of the United Kingdom. I think Soros has merely stepped up a notch, and probably many, many other clever uber-investors.

The politicians and the central bankers believe they are in the process of turning the world’s economy around with their “bailouts” and guarantees and stimulus packages. $684 trillion of derivatives contracts says that there are a lot of very very wealthy speculators (the fees they have paid out to buy these derivatives is substantial and has inflated the profitability of the financial sector) who are gambling on the exact opposite happening. My guess is that they are right and the politicians and central bankers are wrong.

If the politicians and central bankers can even see the brinkmanship they are engaging in, their conceits will never allow them to “fold”. They think they can hold the tide back, and we, like King Canute’s people, are stupid enough to trust them. We have become so used to huge, comforting nanny state hovering above us, that we are blissfully unaware even that the size of the mortgage market is several times as big as our govermments are, let alone the size of the bets that these speculators are placing on the inability of those politicians to turn the mortgage markets, and other markets, around.

Of course the politicians believe that by doing what they are doing, they will turn the markets around and the derivatives liabilities will not eventuate. So, too, do most of the executives of the financial institutions that have been taking these derivative bets; otherwise they would not have taken them.

This is a story begging to be investigated. As governments pour taxpayers money into financial institutions, and borrow and print more and more money for that purpose, how much of it is flowing straight out again into the pockets of George Soros and other successful derivatives speculators? Is that the purpose of politicians mortgaging the futures of their citizens and their citizens descendants of the next few generations?

And who is in the know whether this is what is happening, and why are they not speaking out? The temptation must of course be strong, if you are clever enought to understand what is going on, to participate in the derivatives gamble and enrich yourself. Of course, some people are speaking out and are being politely ignored; like Peter Schiff, Nouriel Roubini, Steven G. Horwitz, Karl Denninger, Bruce Bartlett, George Reisman, Paul Kasriel, David Kenner, Bill Bonner, Harvey Golub, Roger W. Garrison, Steve Eisman,
Ivy Zelman, Meredith Whitney, Robert Blumen, Thorsten Polleit, Hans F. Sennholz, Joseph Salerno, Bill Fleckenstein, Ambrose Evans-Pritchard, Ron Paul, Dean Baker, Frank Shostak, Christopher Mayer, Kurt Richelbacher, Mark Thornton, Antony Mueller, and Stefan Karlsson, to name but a few. Many of these people are followers of the Ludwig Von Mises school of economic theory. I suspect that George Soros and other successful “market breakers” have also absorbed the principles of economic theory that are the achilles heel of our current crop of central bankers, and are using their knowledge and genius to outwit them.

This also raises suspicions whether politicians, central bankers, and executives of financial institutions are complicit. George Soros practically owns the main Left wing politicians of the major countries, from President Obama down.

If you thought that this part of the world was exempt from this kind of risk, think again. Here is Adele Ferguson, in “The Australian” in February 2008:

“…..Australian banks have a big exposure to derivative markets. Their total shareholder value of $110 billion is dwarfed by the size of the banks’ collective exposure to derivative markets of $12.9 trillion.
Put simply, the total derivative positions of the banks are 117 times as big as the banks’ shareholder value. If even 1 per cent of these derivatives contracts default because third parties at the other end get into trouble, the whole shareholder wealth would be wiped out and our banks could be broke.
Given total bank assets are $2.1 trillion, it begs the question why Australia’s banks have exposure to $12.9 trillion of derivatives positions. All banks hedge to reduce risk, but this is a big amount of hedging…..”

Adele Ferguson fails to identify that this is not hedging, this is gambling. She also falls into the classic error that I have expounded on above, when she goes on:

“….Banks worldwide are in a favoured position. While most are listed entities, they can always count on the shareholders being underwritten by the taxpayer in a crunch. The most recent examples of this were Northern Bank in Britain, which reportedly had about €25 billion ($54 billion) pumped in by the Bank of England, and Societie General attracted immediate support from the French Government. In the US, the Federal Reserve has been helping out its commercial and investment banks…..”

This confidence is completely and utterly false. The amount of the liabilities taxpayers are exposed to are astronomically bigger than anything they can cope with. This false confidence that politicians are engendering in us, whereby we all line up happily to give our life’s savings into the care of our “safe and secure” banks, is merely setting us up to provide an increased haul for the biggest fleecing in investment market history; and more than that: the biggest POSSIBLE fleecing: almost all mom-and-pop and elderly folk savings and investments, and the future earnings of several generations of taxpayers.

It just remains to be seen what the recipients of all this wealth choose to do with it. We will all be at their mercy.

Can someone please explain to me where I am completely wrong? I simply cannot understand why this situation is not patently obvious to at least a few people who have it in their power to alert us.

Your plea to politicans to “stop bullshitting, and tell us what we don’t want to hear” ignores unpleasant realities about our political system:

1 If politicans told us the truth about our economic system the political system which is intrinsically linked to our economic system would collapse.

2 Modern society and our power structures are based on many myths. Conventional wisdom about the economic system is just one of them. Established politicans have nothing to gain from telling the truth. Their power flows from bambozzling us. That’s why they never own up. There are no votes in it. It’s like the proverbial turkeys voting for Chrstmas.

If we wish to recover from the mess we are descending into then both our political and economic systems must be replaced.

So we need to look again at monetarism and debate whether, for example, states are the best vehicle to be managing the “money supply” or whether, as Hayek suggested “last time”, this function needs to be privatized and commercialised.

Allied to this, whatever we conclude about who should manage the money supply, we need to understand the privilege bankers have accumulated by the state’s guarantee, implied or, as now, realized in many cases and debate whether the regulation, as a barrier to entry and true competition, is actually worse than the problems it is supposed to cure.

We need to look at the nature of asset price bubbles and its relationship to money supply and have the debate again about land taxes preventing the sinking of “surplus” money into property prices.

None of these are going to have any impact on the current situation, but if we have not settled some of these issues and be ready to implement them when the system is finally ready for its reboot the opportunity may be lost for another cycle.

Yes. Well, actually a lot of the volume on Lloyds is reinsurers insuring other reinsurers, but that’s not the point

“and if you know this , how do you imagine a reinsurer, can make such a decision ?”

A reinsurer definitionally has a lot of capital, and is under various regulatory requirements as to what they can do with it. They don’t like the latter, as it restricts potential returns on their capital. Therefore, they do Clever Things to get round the restriction. Join the dots.

“The reinsurers, eg Munich Re, have fallen far far less than the overall market.”

…and when the dust settles, we’ll see whether that was the right call.

Meanwhile, BH is atypical precisely because of Buffet’s long-term stance against doing investment-bankery-jiggerypokery to push up returns.

John you do know that Reinsurance is when you insure a direct insurer and if you know this , how do you imagine a reinsurer, can make such a decision ? Can I take it that your knowledge of this is actually of the sort that can be written on a Jew`s foreskin and you just thought “Reinsurance” sounded impressive .( don`t forget your coat ….)

Companies collapse because ‘markets’ are susceptible to exactly the same kind of contagion and hysteria.

If enough people say it will be so (and act accordingly) then it will be so.
This is why house prices went through the roof in the first place – who knows what the real value of property is other than the aggregation of x% of collective anxiety ?

I’ll be sure to let my acquaintances in the reinsurance industry know this. They may have thought that they were doing clever things that entirely blurred the boundary between insurance and i-banking, and they may currently be rather concerned about what’s going on, but luckily Newmania has spoken and they’re all fine.

Luis, excellent stuff. I’m sure if you fancy doing another ‘economy’ post for LC Sunny would be delighted to put it up…

See above believe the mystery is solved Only AIG were thusly exposed no-one else is ( Although there are rumours about Quinn Direct)Insurance Companies are sort of not allowed to live on debt it would be kinda illegal for obvious reasons .Nope I think Sunny thinks all things called Lloyds are the same thing.
Either we see a pretty fancy explanation pretty quick or I nominate Mr. Sunny Hundal for most stupid remark of the decade .

Oh Christ I have just realised. Hundal the genius thinks Lloyds TSB is the same thing as Lloyds of London . Yes thats right Sunny it’s the same thing just like all people called Lloyd are the same thing Clive Lloyd , David Lloyd . Same person

Why not

falling employment => lower wages => more employment

or

=> more defaults => less bad loans =>
(Surely far more likely )

more bank liabilities => less bank lending => more bankruptcies => confidence that the remaining companies have real value=> more loans => recovery

Honestly you people make me laugh .Yesterday it was going to be a boom forever and today we are all going to hell because house prices are what was called stratospherically high a year ago . Sunny seems to me to latch words together for their sound , I still have no idea what his Lloyds Bank/ World Insurance connection is does anyone have any clues at all?

Sunny why do you think the end of Lloyds Bank would take half the insurance markets and then what you vaguely refer to as “World markets ” out ? You have utterly lost me there .

Is there anyone who knows what Sunny is talking about ?

Well said – never did understand what was wrong with “boom and bust”. They are like night and day, you can’t have one without the other.

http://blogs.news.sky.com/boultonandco/Post:353e0b48-79cc-439b-b729-3e77982c64c4