“Gold is a barometer of the common stock of a country, and right now gold is sniffing out weakness in the management of the United States as a business,” said Mr. Sinclair, 65, a lifelong Republican who twice voted for President Bush. “Iran is becoming a nuclear power. The chairman of the Federal Reserve is on a puppet string controlled by the White House, and there is no such thing as a strong-dollar policy when the dollar is heading south.”
Source link: http://archive.mises.org/5011/the-new-york-times-notices-the-gold-boom/
The New York Times Notices the Gold Boom
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Wow, I’m shocked. Is this some sort of a trick? I never thought I’d see the NYT write a semi-positive gold article in my lifetime. Is this a setup?, is the Fed getting ready to dump a ton of gold onto the market? First the BIS, and now this. I smell that the powers that be have decided to dump the dollar as a reserve currency. God help us, the transition is going to be one hell of a ride.
I was always curions which pillar would fall first. a)dollar/bonds b)stocks/derivatives or c)housing. It looks like option ‘a’ is the winner.
What is wrong with derivatives?
Ok, I am not an expert, but here’s my take …
With derivatives there are trillions of dollars worth of bets that the market, stocks, wether, gold, or interest rates will go one way or the other. The number of outstanding bets is in the 100′s of trillions.
In a situation where someone has 1 billion in derivatives that the market will go up, but then when the market starts to go down and they bet 999 million that the market will go down to cover their risk. In book terms, 1 billion minus 999 million is a total exposed risk of 1 million. But that is faithfully assuming that everyone can meet their contract obligations. As soon as one side of the contract fails then they are not only in hole for a million, but a billion which will cause defaults on other contracts and so on causing a chain reaction of systemic defaults.
Normally market forces would address this kind of systemic risk, but after the 87 crash, LTCM, and the Asian currency chrises – the markets got the message loud and clear that the Fed will bail them out if anyone in the chain defaults on their obligations. So now many expose themselves to derivatives in a way that would be reckless and insane otherwise.
Unfortunately, the fed could bail out a billion dollar default without problems. They could even bail out a 100 billion default without much fuss. But with an estimated 270 trillion in balanced derivatives bets – the fed can’t even touch potential systemic defaults without setting off an inflationary adjustments, but that unexpected inflation shock would likely cause even more defaults.
In addition, many derivative contracts are not simple. They often have lots of complicated and obsecure rules and caluses, and they trade by computer model’s that can only guess their value. Which translates to – there are a lot of hiden risks that not everyone understands.
Derivative trading has some tax value, but IMHO the solution to overtaxed capital gains is not derivatives, but no capital gains tax.
Dave,
Say “Counter-Party Risks” & “Moral Hazard” +
unsophicates getting their portfolios stuffed by the I-Banks selling them.
and, financial models that wouldn’t be able see a “fat tail”, even if a beaver was gnawing on them.
btw, The FedRes has been putting out fires along the derivatives “daisy chain” for years…it’s one of the reasons M3 has been growing as explosively as Wall St.’s earnings–a true Heads, I win, Tails, you lose…the loser, as always, holders of U$D.
By derivatives you mean the stuff that trades on the CBOE and NYMEX, as well as exotic stuff?
“it’s one of the reasons M3 has been growing as explosively as Wall St.’s earnings”–
How does M3 grow because of derivatives? I have been trying to figure out M3 for a while, but I thought it had more to do with foreign central banks than derivatives from domestic markets.
“The FedRes has been putting out fires along the derivatives “daisy chain” for years…it’s one of the reasons M3 has been growing as explosively as Wall St.’s earnings”
M3 One measure of the money supply that includes M2, plus large time deposits, repos of maturity greater than one day at commercial banks, and institutional money market accounts.
banker, I saw a/that Foreign CB reference to M3 as well, as part of a rationale to excuse its discontinuance of publishing by the FedRes– I, and colleagues, think it’s MSM HS.
Derivatives, their ownselves, don’t show up in monetary aggregates. The FedRes’ actions, putting “fires” out, along the counter-party “daisy-chain”, certainly does.
The exchange traded derivatives tend to be less dangerous due to higher “knowability” and, especially, Liquidity. The OTC stuff can be/usually is quite a bit more “squirrelly” & alot less liquid.
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