We’ve All Been Had
by Rob Kirby
The U.S. economy is financial-ized to the point where 5 institutions alone have created 175 Trillion worth of derivatives – quite a trick in a 13 Trillion economy, ehhh?
So, is it a stretch to say that the current production of the financial-ized U.S. economy “is” derivatives? So what share of this notional should we be adding to U.S. reported GDP [approx 13 Trillion] to adequately account for Derivatives?
As it stands now, only revenue [8 – 12 billion per annum in fees] generated from trading these “off balance sheet” instruments is attributed - counted in bank revenues. But as we have learned in recent times; when things go awry with these instruments – many TRILLIONS of losses quickly materialize and migrate to these banks’ income statements, negatively affecting GDP. Amazingly, folks who trade these instruments are widely referred to as “smart money”, but the empirical evidence “screams” that these derivatives instruments are bought and sold [conjured] into existence by individuals who do not fundamentally know what they are worth.
The dichotomy arises due to the manner in which mark-to-market accounting rules are applied – losses being crystallized and ‘counted’ on the income statement [negatively affecting nominal GDP] while gains are left to accrue off-balance-sheet where they are NOT MEASURED [no affect on measurable GDP], because doing so would be construed as a taxable event. This is and has been the root of a major dilemma in the accounting treatment of derivatives for YEARS. The fact that derivatives are treated in this fashion is not sound from a purely economic perspective but rather traditional from an accounting perspective.
The observable implications are that these instruments always have had MUCH greater impact on nominal GDP than the current “practice” of recording trading fees as revenue only. It’s all about gearing and the point from which you measure your base. Remember, for the past 15 years – right up until Q2/08 - these outstanding notionals have done nothing but mushroom – and in the past few years, leap by as much as 20 to 30 TRILLION in notional in a given year:
So then, what percentage of the growth of these outstanding notionals should be prudently attributed to GDP? Let’s just say a small percentage of the growth in these notionals could amount to TRILLIONS in addition to annual nominal GDP. If measured, this would have had a material impact on reported numbers and quite possibly “red flagged” the inflationary spiral we are about to experience. You see folks; velocity of money, as it is currently measured, is no more honest-a-measure / accurate-determinant of inflation as Bernard Madoff was an honest stock jockey.
What too many ignorant, compromised, or would-be-economists refuse to grapple with is the notion that ALL fiat money systems – like table cream - have “shelf lives”. As Chris Martenson so eloquently sums it up,
“…there are over 3,800 past examples of paper currencies that no longer exist. There are numerous examples from the United States, which may have some collector value but no longer possess any monetary value. Of course, I could just as easily display beautiful but no longer functional examples from Argentina, Bolivia, and Columbia, and a hundred other places.”
by Rob Kirby
The U.S. economy is financial-ized to the point where 5 institutions alone have created 175 Trillion worth of derivatives – quite a trick in a 13 Trillion economy, ehhh?
So, is it a stretch to say that the current production of the financial-ized U.S. economy “is” derivatives? So what share of this notional should we be adding to U.S. reported GDP [approx 13 Trillion] to adequately account for Derivatives?
As it stands now, only revenue [8 – 12 billion per annum in fees] generated from trading these “off balance sheet” instruments is attributed - counted in bank revenues. But as we have learned in recent times; when things go awry with these instruments – many TRILLIONS of losses quickly materialize and migrate to these banks’ income statements, negatively affecting GDP. Amazingly, folks who trade these instruments are widely referred to as “smart money”, but the empirical evidence “screams” that these derivatives instruments are bought and sold [conjured] into existence by individuals who do not fundamentally know what they are worth.
The dichotomy arises due to the manner in which mark-to-market accounting rules are applied – losses being crystallized and ‘counted’ on the income statement [negatively affecting nominal GDP] while gains are left to accrue off-balance-sheet where they are NOT MEASURED [no affect on measurable GDP], because doing so would be construed as a taxable event. This is and has been the root of a major dilemma in the accounting treatment of derivatives for YEARS. The fact that derivatives are treated in this fashion is not sound from a purely economic perspective but rather traditional from an accounting perspective.
The observable implications are that these instruments always have had MUCH greater impact on nominal GDP than the current “practice” of recording trading fees as revenue only. It’s all about gearing and the point from which you measure your base. Remember, for the past 15 years – right up until Q2/08 - these outstanding notionals have done nothing but mushroom – and in the past few years, leap by as much as 20 to 30 TRILLION in notional in a given year:
So then, what percentage of the growth of these outstanding notionals should be prudently attributed to GDP? Let’s just say a small percentage of the growth in these notionals could amount to TRILLIONS in addition to annual nominal GDP. If measured, this would have had a material impact on reported numbers and quite possibly “red flagged” the inflationary spiral we are about to experience. You see folks; velocity of money, as it is currently measured, is no more honest-a-measure / accurate-determinant of inflation as Bernard Madoff was an honest stock jockey.
What too many ignorant, compromised, or would-be-economists refuse to grapple with is the notion that ALL fiat money systems – like table cream - have “shelf lives”. As Chris Martenson so eloquently sums it up,
“…there are over 3,800 past examples of paper currencies that no longer exist. There are numerous examples from the United States, which may have some collector value but no longer possess any monetary value. Of course, I could just as easily display beautiful but no longer functional examples from Argentina, Bolivia, and Columbia, and a hundred other places.”
Our current system has, arguably, already passed its expiration date. Derivatives have been used to obscure-the-curdles [rig markets]; but they cannot hide the rancid odor emanating from the rotting carcass of the fiat corpse of the Federal Reserve.
How Deflation Creates Hyperinflation
It is no accident that many of the worst periods of hyperinflation are preceded by deflation. In fiat currencies with high levels of government debt, severe cases of deflation cause a loss of confidence in the nation's currency by shrinking the economy and making the government's debt appear increasingly unsustainable. The loss of confidence then causes the flow of money to speed up as individuals become desperate to exchange cash for real goods as fast as possible, producing hyperinflation.As an example of deflation leading to hyperinflation, consider the case of the Weimar Republic. In 1920, Germany experienced a deflationary collapse, with the average citizen finding it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks, and businesses were strapped for cash to buy materials and meet payroll. Fearing a collapse that would throw millions of workers out on the street, the German government desperately printed money in an attempt to re-inflate the economy. During this period, despite the government's money printing, the mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%.
Eventually, as a result of the money supply's rapid expansion, the nation's massive foreign debt, and the shrinking economy, German citizens lost all confidence in their currency, and the Weimar Republic experienced one of the worst cases of hyperinflation in modern economic history. Billions of hoarded marks came out of hiding and entered the marketplace.
1) Deflation slows the speed of money to crawl due to fears about the deteriorating economy. The public hoards cash, or, in the case of the US, short term treasuries.
2) The slowing speed of money and debt destruction force the government to create huge quantities of cash to prevent prices and the economy from collapsing. However, because the public is hoarding cash (or short term treasuries), most of the money doesn't reach the real economy, which leads the central bank to print even more money. In essence, cash hoarding acts as a dam, preventing the enormous quantities of printed money from affecting prices.
3) Deflation weakens economy until it leads to a loss of confidence. With doubts about the government's solvency growing, the velocity of money quickly picks up speed, and a flood of hoarded cash comes out of hiding, entering the marketplace all at once and creating hyperinflation.
http://www.marketskeptics.com/2008/12/how-deflation-creates-hyperinflation.html
To President Obama [great read]
by Howard S. Katz
Dear President Obama:
I read in the newspapers that you want to stimulate the American economy. I know more than any of your economic advisors, and I can tell you how to stimulate the economy.
I also read that you are a Democrat and that you favor change. This is a good start. The Democratic Party was founded by Andrew Jackson and Martin van Buren in 1828. They also favored change, and they wanted to stimulate the economy. This they did by abolishing the central bank (the Second Bank of the United States). Andrew Jackson ran for reelection in 1832 on the platform that the people could have:
“a bank and no Jackson or no bank and Jackson”
The people of America chose the latter, and Jackson was reelected by an overwhelming majority. It became received political wisdom in America for the next 80 years that to advocate a central bank was political death, and when a 3rd central bank was brought back to this country, its advocates swore up and down that it was not a central bank.
...
During the 1930s a set of lies was made up. The 1930s were indeed a depression for the bankers and for Wall Street. But they were not a depression for the country. The period was described as a depression because the bankers and Wall Streeters could not win sympathy for themselves. They could not appeal to the average voter by saying, “Help me, I’ve gone down from $10 million to $1 million.” Such a plea would have fallen in deaf ears. So they made up a set of lies, and these lies were then taught, by the banker economists, in economics classes all over the country.
One of these lies was the Keynesian theory of the liquidity trap. It holds that all of a sudden, for no discernable reason, people stop spending money. Well, people did stop spending money in the early 1930s, but the reason was plainly discernable. The money supply dropped by 30% in 3 years. This caused a similar drop in prices, very much to the benefit of all consumers. During this drop prices fell rapidly, but wages lagged behind. Thus although nominal wages fell, real wages rose, and this is what caused the rise in unemployment.
The unemployed of that day did not realize that lower nominal wages were just as high in real terms, and they refused jobs which paid wages they considered beneath their dignity. An employer of the day solved this problem by posting a job for $50/week ($850/week in modern money) but requiring that the workers kick back $10 to get the job. Their real wages were $40/week ($680/week in modern money). But this was acceptable to them because they could now convince themselves that they were $50 dollar men.
These same lies are going on today. In the 1930s, we had a real fall in money and a real decline in prices. Here in 2009 we have conjured up an imaginary fall in money and an imaginary decline in prices. Commodity prices have been on the rise since 2001. They had a 9 month decline from March to December 2008. Such declines are quite normal in long bull markets. They are caused by speculators getting cold feet and running for the exits. Such declines are buying opportunities not evidence for a major crash. They are like the commodity declines of the 1970s, not the declines of 1930-31.
http://news.goldseek.com/GoldSeek/1233590198.php
Silver could be the investment opportunity of this generation
Gold has already made new all time highs in U.S. dollars (last March), but silver never really came close. That’s particularly odd given that the world really doesn’t possess all that much above ground silver to spread among all its inhabitants.
Indeed, when silver cut its all time nominal high in U.S. dollars near $50 in 1980, the best estimates are there was close to double the amount of silver available then, some 29 years ago last week, compared to now. Some very popular silver analysts suggest that there is an even larger difference; they say that there is even less than half the silver metal available now, but 100% more silver in 1980, or rather, 50% less metal now seems like a safe assumption given sovereign dishoarding and a continued production-to-consumption deficit since then. Let’s go with half the silver today available than in 1980. If wrong, it’s on the high side, not the other way around.
In 1980, the world population was about 4.43 billion souls, more or less. World population in 2008 was estimated at 6.7 billion, up 2.27 billion or about 51.24% higher than then.
According to Dollardaze.org, in 1980 there was on the order of the equivalent of $6 trillion of global money supply in all currencies in all forms. By late 2008 global fiat money supply had ballooned to $60 trillion U.S. dollars worth of all global money supply. That’s an increase of $54 trillion or about 900%.
In 1980, there was no such thing as a silver ETF. Virtually all the action was contained in the OTC markets, the futures markets and in physical metal through a wide array of private dealers. For ordinary investors and large institutional investors alike it was not as easy to trade silver in 1980 as it is today.
Let’s sum up just this much so far. Today versus 1980 we have globally 51% more humans using 900% more “dollars” to chase 50% less silver in a world where any one of those individuals can use a cell phone or a mouse click to buy silver via an ETF in seconds. Oh, one can still buy futures, or physical silver from your local dealer too, but the point is there are many more options to gain exposure to the silver market available today. So when silver does catch on it can do so like never before.
Despite this, silver “only” managed to achieve about 40% of its $50 all time nominal 1980 high last March, while its more popular cousin, gold, eclipsed its 1980 peak of $850 by 21.6% to $1,034 as the Lehman news was surfacing. That fact alone tells us something interesting. It tells us this bull market for gold and silver is still young. At least I think so.
Sure, the 1980 peak for silver was a mania event driven by an attempted speculative corner by the Hunt brothers and the Arabs, but both gold and silver were involved long before the peak and silver maintained a price of $16 for over a year on either side of that blow-off top.
Not incidentally, $16 in 1980 dollars is the equivalent of $42 in 2008 dollars. Silver would have to advance 230% from its Friday $12.66 cash market close just to equal silver’s lower range in 1980 in real terms. Silver would have to rise to $131 to equal its real 1980 silver mania purchasing power peak.
Just because silver hasn’t yet caught on with the masses yet doesn’t mean it never will. If the extremely high premiums for the real deal silver metal on the street and metal additions to silver ETFs are any guide, it’s already growing in popularity strongly.
http://www.stockhouse.com/Columnists/2009/February/2/Gold,-silver-breakout-watch--Got-Gold-Report
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