The Derivatives Market Monstrosity

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Previously
by Richard Daughty: The
Federal Reserve and Its Secret Set of Books

 

 
 

I assume that
you, as an intelligent person who understands that the treacherous,
greedy, vampire banks creating so much excess money means We’re
Freaking Doomed (WFD), are Up To Your Freaking Ears (UTYFE) in gold,
silver and oil, and you have had it UTYFE with your family always
complaining about how you spend all the family’s income on
gold, silver and oil instead of luxuries, family vacations, adequate
food, clothing, medical care, dental care, blah blah blah, the list
goes on and on.

But what you
really, really want to know is: How did we get into this mess?

In that case,
I present the Buttonwood column of The Economist magazine.

Some guy who
read an economics book a long time ago, but hasn’t learned
a thing nice, laughably wrote, “It is an economic truism that
savings must equal investment.” Hahaha!

See? I told
you it was laughable, as I handily proved by laughing! Hahaha!

You’d
think that the editors of The Economist would have heard
me laughing about it and ask, “What is so funny?” and
yanked it! Hahaha!

To be fair,
it USED to be an economic truism, prior to 1971, that savings must
equal investment. And it was a truism because with a gold standard,
the money supply was obviously a relative constant, and so if you
wanted to get your hands on some money to invest, you had to borrow
it from someone who already had some money.

Enter, stage
left, the savers. Their money was being saved in the banks, and
with the banks acting as an intermediary to judiciously loan it
out as an investment, at an interest rate that cleared the market,
paying the depositors a small fee from the proceeds, and keeping
the rest for themselves. Classic stuff.

All that changed
in 1971 when President Richard Nixon declared that the dollar was
no longer backed by gold, and so all those foreign nations who were
growing distrustful of the dollar because we were creating so many
of them, and were literally exchanging their dollars for gold, were
told, “Screw you, you worthless foreign bastards! You got paper
dollars and you’ll keep paper dollars! And if you don’t
like it, too bad! Hahaha!”

The result
was the gradual debasement of the dollar by the Federal Reserve
ever since, as it continually created more and more credit and fiat
money, which continually inflated the money supply, which made prices
continually creep up and up.

As if inflation
was not bad enough, a lot of that money (about $14 trillion) went
towards loaning money to buy government bonds so that foul, corrupt,
fiscally irresponsible Congresses could spend money they did not
have! Gaaahhh! The worst of both worlds!

Even worse,
a lot of the Fed’s new money also went into bubbles in stocks,
bubbles in bonds, bubbles in houses, bubbles in derivatives, and
a huge, suffocating bubble in the size and cost of local, state
and federal governments.

And let’s
not forget the derivatives market, which is so gigantic that it
staggers the imagination! How large? Thought you’d never ask!

The Financial
Times, as part of a story about the changes coming as a result
of the Dodd-Frank financial reform bill, refers to “the $583,000bn
privately-traded derivatives markets, as mandated by the Dodd-Frank
financial reform.”

Now, in case
you are not immediately familiar with computing “billions of
billions,” the number “$583,000 billion,” which doesn’t
sound too bad, is actually the terrifying sum $583 trillion, which
is significant in that the total GDP of the world – and I am
talking about the total annual output of goods and services by everyone
in the Whole Freaking World (WFW) – is only about $65 trillion!

This means
that the derivatives market, alone, is 900% bigger than global GDP!
Gaahhh!

And as unbelievable
as it is to say, that monstrosity is just one of many, many weird,
weird, bankrupting, bankrupting things that happened, happened because
the world’s central banks created so, so much, much money for
so, so long long.

And all of
that is exactly why buying gold, silver and oil is such an easy
decision to make, and so deliciously guaranteed of capital gain,
that you happily exclaim, “Whee! This investing stuff is easy!”

December
25, 2010

Richard Daughty (Mogambo
Guru) is general partner and COO for Smith Consultant Group, serving
the financial and medical communities, and the writer/publisher
of the Mogambo Guru economic newsletter, an avocational exercise
to better heap disrespect on those who desperately deserve it. The
Mogambo Guru is quoted frequently in Barron’s, The
Daily Reckoning, and other fine publications.

The
Best of Richard Daughty

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