Tuesday, May 18, 2010

Flash Deflation

The Euro plunged to new lows as Germany banned the naked short selling of bank stocks to avoid a Greek tragedy of its own. Wall Street huffed and puffed that Germany is desperate and has no business doing such a thing, read that, Wall Street missed making a killing. Naked short selling is a derivative exchange where nothing of any value is traded but since these instruments can in theory be traded for real stocks they do in fact set the market. This works in the same way Wall Street banks add another dollar onto the price of gas by running up the futures market.

The big Wall Street banks still have the trillions they were loaned interest free by the Federal Reserve after the crash and since the Fed has been "afraid" to tighten lending, the free money continues to flow. Nobody is safe from this sort of predation. The Republicans are filibustering a bill that would restrict the practice of naked short selling in the US. The SEC is rolling out new market rules that will severely restrict trading in large stocks with the intention of preventing another Flash Crash. They have yet to really explain the how this crash occurred but the fix indicates that they see a systemic risk from the massive trades the Wall Street banks are capable of making.

The thing to remember is that the Wall Street banks aren't gambling with their own money but with borrowed money. Their entire liquidity was wiped out during the last crash so it's only a matter of time before it all comes crashing down again. When a huge amount of debt is wiped out as happened in 1929 then runaway deflation sets in. Prices fall uncontrollably, businesses can't borrow and are afraid to buy anything because it won't we worth as much tomorrow if they can sell it at all. Massive layoffs begin to create a self reinforcing spiral of collapse. The government can step in with printed cash but they've already done that and it won't be as well received this time. There is also the problem of everything coming from China and that could stop which would create total chaos in short order.

This scenario is a real economy killer and sets the stage for fascism to take hold as it becomes tempting to take the assurance of stability (and something to eat) in place of that messy democracy. Anybody who thinks voting is a waste of time will miss it when it's gone. www.prairie2.com


RobertM said...

I'll go you one further and say all short selling should be banned. When one sells a stock short, they 'borrow it' and then sell it hoping the price will go down, at which point they can buy the stock back, 'return it' to the original owner and pocket the difference. Was the original owner of said stock, who purchased the stock in hopes of it going up, informed that his stock was going to be used to decrease its value? If he doesn't have the physical stock in his possession, the answer is no. The 'permission' is given in the fine print of the stockbrokers agreement and the stockbroker is making money off something he doesn't own. As Ellen Brown points out in "Web of Debt", this is a form of counterfeiting because there are now 2 claims on the same stock. It is an expansion of stock much like how the fractional reserve system expands the money supply every time a new loan is created.

Short sales are not providing what they claim it to be used for and are instead used as economic weapons. The IMF and other speculators have used these weapons to put countries into needless debt. It's time we end the unjust enrichment banking parasites have extracted from economies and return the money creation privilege to governments where it belongs. Governments are the only representation citizens have. We have to fix government. It's the only game in town.