Monday, May 10, 2010

Melt them down before they get us

World markets all finished up sharply today, it’s amazing what a trillion dollars worth of imaginary money can do. European central banks and the Fed have put up newly printed money to keep the Euro from going through the floor. They are also going to extend credit to Greece and some other countries that agree to accept onerous terms from the IMF. This will presumably keep the hedge funds from short selling the smaller countries bonds and driving up interest rates. Greece is looking at 20% interest making the reissue of their debt impossible so they will default and the contagion will spread to other countries potentially triggering trillions in derivatives.

Printing huge amounts of money won’t work on the long run because of that pesky inflation. They will all need to come to some agreement on banning this kind of predatory activity. Almost everything these hedge funds do was illegal prior to Reagan and the last of the restrictions were removed by the Clinton and the Republican Congress in the nineties.

The reason the equity markets have reacted positively is that this deal not only stabilized the Euro but other lesser currencies as well. This keeps the carry trade from collapsing. The sky rocketing USD was forcing investors who had used the cheap USDs to buy into foreign markets to repay more dollars than they borrowed. These traders can hedge their carry trades by buying derivatives or bets against the currency they have converted USD into. If this had been allowed to continue past the weekend it could also cause the quadrillion dollars worth derivatives to start to unravel. In theory derivatives would all balance out but in reality there are the AIG’s and the Goldman Sachs. Some lose all and some make billions. We get to starve among the wreckage of capitalism.

Thursday’s flash crash was just a taste of what we could have seen this week. Everything is done on credit and if you need to cover your margin call then you have to sell at any price you can get. They still aren’t saying what really caused the “machines” to panic and start selling stocks down to a fraction of a penny. The latest excuse is a miss match of trading rules between the various exchanges. This seems as far-fetched as the fat finger typing excuse they started with since these exchanges have been integrated for years and the market wasn’t doing anything that unusual before the screens all turned bright red. The machines are out to get us. They should all be melted down to make more cans for canned goods.