Friday, April 30, 2010

The only growth is in Gulf oil

SELL, that’s the word on Goldman Sachs from the people who rate stocks at Standard & Poors. This follows word from DOJ that they are considering criminal charges unrelated to the civil case brought by the SEC but based on information uncovered by the commission’s investigation. It’s likely that any small amount of digging will unearth enough crime to keep prosecutors busy for years. Even though they measure their bonuses in billions the Wall Street bankers weren’t satisfied with merely doing things that were illegal between 1933 and 1980. Of course during the past eight years no crime at a bank that didn’t involve a mask and gun was prosecuted so why would they hold back.

The carry trade is getting more attention in the economics press with the senior finance regulator in Great Britain giving a somber speech on the danger this practice is creating. "Foreign exchange carry trades are, as far as I can see, of zero value and potentially destabilizing…” so says Lord Turner (wouldn’t Republicans just love to have actual titles) There is at least a trillion USD worth of this pestilence currently on the books. Iceland was a victim of the carry trade, as things got hot capital fled and they were suddenly broke. The entire country came within 30 days of starvation (that’s when the canned herring would have run out).

I personally think there is a lot more misery hidden in the quadrillion USD (a thousand trillion) of derivatives spread across the planet. The financial reform bill would require companies that deal in derivatives to actually have capital reserves. Even modest capital requirements could involve trillions of dollars, hence the tooth and nail fight in the Senate to exempt them.

At the end of the Bush Adm, there was also a lot of Dollar-Dollar carry trade to prop up the banks with the Fed lending them money at zero interest and the banks buying US Treasuries at 3.5%. An awful lot of the money we owe as a nation is owed to Wall Street banks that could only afford to buy our debt because the Fed loaned them money printed in our name at no cost. The Fed has issued 14 Trillion or more in this manner and won’t say to who.

The 1st Qtr GDP was up 3.2% but if you stripped out increases in energy costs provided by Wall Street it would be more like 1% and you need 5% growth to ad any jobs. How bad are things really? One in eight Americans plan to pull the plug on premium TV services or eliminate pay TV altogether. For entertainment we can go down to the beach and watch the oil tide come in. The leak rate is now rumored to be 25,000 barrels/day up from 5000, up from 1000, up from zero with no end in sight. Spill baby, spill.