Baseball91's Weblog

November 20, 2009

The Cost of Fantasy Football & Fantasy Money

Zero sums gains. When I lose, who wins?

Since 2002, my retirement accounts are worth 38% less, being in U.S. dollars, compared to a basket of currency in exchange traded funds. Where did that 38% go? By the end of October 2008, more than half of the U.S. banks were pretend banks.

With fiscal policy, American all had pretend dollars in oh so many pretend banks which were for all practical purposes, insolvent. Pretend banks, a lot like a house of cards propped up by elected officials who have postured, positioned and proffered assurances. Bankers ,who should have been out of business, making those very nice salaries. Incompetent bankers.

In November 2008, Elizabeth Moyer wrote in Forbes that fighting the financial crisis put the U.S. on the hook for some $5 trillion, perone report. The inspector general for the Troubled Asset Relief Program (TARP), Neil Barofsky, reported that since 2007 nearly $24 trillion was exposed in government money to financial institutions, after he examined the programs (50 of them) set up by the Federal Reserve as well as by the Bush and Obama administrations.

In a more recent report Scott Reamer of the Vicis Capital Hedge Fund reports American sources have funded upwards of $20 trillion dollars of the total $30 trillion funded world-wide through markets from “direct lending and indirect backstops” with the litany of bailouts, stimulus, conduits, mortgage freezes, foreclosure programs, working groups and government sponsored investment efforts, all while global central banks and government agencies are creating credit. All at the cost to currency values and the U S Dollar. It was like the invisible cost that the Goldman Sachs, the Fidelitys made each year charging me 1.5% managing my mutual fund IRA. The fees never appeared on any statement. It was all a free ride. Was this all just one big illusion?

There was still a clear and present danger to the total system. The invisible ink would soon become visible.

Systemic symptoms. When the financial system got inflammatory bowel disease. There was wonder here, like a patient with Crone’s Syndrome, accompanied by diarrhea, if things will ever be the same. Last week the Treasury Department said Thursday that the deficit for October totaled $176.4 billion. For one month!

“As growth recovers and strengthens, we’re going to bring our fiscal positions back to a sustainable balance,” was the quote from Timothy Geithner.

Fear. You carry it around on your shoulders. Everywhere. Or in your pants. “Banks bear some responsibility for the extent of the damage caused by the crisis,” Geithner said today at a small- business conference in Washington. “You carry a substantial obligation to help our communities get back on their feet.”

SOME RESPONSIBILITY
for the extent of the damage?

How big a factor is Wall Street’s greed and lack of morals? Is it morally acceptable to pay yourself $14.2 million? In 2007 the chief executive of a Standard & Poor’s 500 company on average made $14.2 million in total compensation. In 2004, the ratio of average CEO pay to the average worker was 431-to-1, compared to 107 times more in 1990. At the height of the tech bubble, the ratio of CEO compensation to the average pay of a production (i.e., non-management) worker in 2001 was 525-to-1, according to “Executive Excess,” report which was released by a liberal research groups United for a Fair Economy and the Institute for Policy Studies.

People who felt they were immortal. Pulling out all the stops in an attempt to flush the system with liquidity. Policymakers. Congressmen and Congresswomen.

There is growing distrust of America. Has the fact war debt was never on the books of the Congressional budget been heard in China? It was not well known in the United States. How could policymakers, your House of Representative who approves the budget, never have seen the cumulative imbalances building? These 435 members of Congress believed in their own illusion of greatness?

The Pew Research Center for the People & the Press is an independent, non-partisan public opinion research organization. On November 11, 2009, The Pew Research Center issued a survey indicating a glum mood of Americans, where two-thirds of the public is dissatisfied with the way things are going in the country, with fully nine-in-ten saying national economic conditions are only fair or poor, and nearly two-thirds describe their own finances that way – the most since the summer of 1992.

It seemed time for the working man and woman to take back the Democratic Farmer-Labor Party from the lobbyists and elected officials like my representative in the House of Representative who voted to support this. Betty McCollum seemed to think all of this was all just some kind of a pursuit like fantasy football.

Todd Harrison writes at his most recent pieces on MarketWatch the current course of fiscal and monetary policy is absolutely insane. Through the lens of Albert Einstein who once said that the definition of insanity was doing the same thing over and over again and expecting different results. The same thing in this case being monetary policy with interest rates below one percent.

Hyman Minsky was an economist who wrote about bubbles that occur in an economy. He theorized that a bubble begins with displacement caused by a significant invention, like the internet. A displacement creates profitable opportunities in any given affected sector but, rather than invention alone, financial innovation is necessary for access to cheap credit before a kick-off to an over-trading phase. THE ACCESS to cheap credit is still there. For some.

Some facts from 2008:

World GDP $47 trillion
World stock valuation $121 trillion
Bond market $85 trillion
Credit derivatives$473 trillion

Whatever happened to those credit derivatives? The last number I read put the credit derivatives market was $560 trillion. Are companies yet required to place reserves on credit derivatives, like the state regulated insurance industry?

On May 2009, Paul McCulley of PIMCO wrote, “The longer people make money by taking risk, the more imprudent they become in risk-taking. While they’re doing that, it’s self-fulfilling on the way up. If everybody is simultaneously becoming more risk-seeking, that brings in risk premiums, drives up the value of collateral, increases the ability to lever and the game keeps going. Human nature is inherently pro-cyclical, and that’s essentially what the Minsky thesis is all about.”

Because the rest of the world is unable to extricate themselves from the interwoven financial machination. In a nation where the average credit card debt is $8,300. Masking by the spending habits of a slimming margin of society, as well as by the federal government, with the populace unaware that they have been skewed, here comes the affects of a lower dollar. Down 12 percent in one year. Down 38 per cent in five years, in part to finance the war in Iraq. And now in Afghanistan. As I understand it, war debt never was on the books of the Congressional budget. While Goldman Sachs keeps manipulating markets with access to cheap money, and rewarding money managers way beyond measure. When no one questions the morality of a paycheck, Of over indulgence.

Fear. In the free world. “Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.” – Charles R. Morris

Charles R. Morris, a former banker, is the author of he Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash before the 2008 market collapse.

Hyman Minsky said euphoria ensues as people pile into a sector, with a driving demand to affect higher prices, often with borrowed money. In this case, continued cheap money. With an arrogance. With no sense of morality. Ponzi’ investors join in speculation that someone will buy their assets at higher prices. But markets eventually, whether due to lenders tightening lending criteria or insiders selling out, hit a peak. Panic then sets in. With a stampede out of the market, bankruptcies ensue.

The social engineering in September 2008 was all about government trying to keep capitalism going. Is it one big Ponzi scheme? With lobbyists playing a central role? Those derivatives, not backed up by reserves. When the laws of survival of the fittest in the market place had been always about letting systems collapse. Until there was Henry Paulson. And Congress. Democrats and Republicans. Without a clue. Or they believed in their individual greatness? In the big illusion.

Slowly China is tweaking the financial system. The one based upon the dollar. The system in which the OPEC nations along with China have seen their loss of valuation of 38 percent too. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold which used to create a built-in support for a strong dollar that in turn forced the world’s central banks to acquire and hold more dollar reserves. Making the dollar stronger. In the world before September 2008.

In July 2009, Zeng Peiyan, the head of China Center for International Economic Exchanges and the former Chinese Vice-Premier, in a speech in Beijing called for a new system to ensure the stability of the major reserve currencies, according to the China Daily. In China, Obama met with Chinese government officials who say one thing, while central bank chief Zhou Xiaochuan believed in the development of a new super-sovereign currency largely taking the place of the dollar. He actually had accountabilities for banking in China.

On the heels of discussion at the G20 meeting of a new world currency, Chinese Premier Wen Jiabao in April 2009 called for more surveillance of countries like the United States that issue major reserve currencies.

If you missed it, Timothy Geithner has insisted that the US Treasury has a strong dollar policy. Top story in November 2009. He said the Obama administration was committed to a strong dollar and to actions aimed at bolstering its value, giving reassurances to Asian nations last week. He comes from the world of central banks where expressions in bankspeak are neither normal or clear in normal everyday discourse. It is not clear if the strategy between the Fed and the European Central Bank is coordinated or not, or to what extent. It has been written that lectures were given President Obama and Timothy Geithner by top Chinese officials earlier in the week about the risks posed to the global economy by America’s ultra-low interest rates and soaring government deficit. The New York Times reported that Mr. Obama had NOT extracted a fresh commitment from Beijing to revise its policy of keeping the renminbi pegged at an artificially low value against the dollar soon. On Tuesday Obama “could only cite China’s ‘past statements’ in support of shifting toward market-oriented exchange rates.” Was this all an illusion? Some kind of fantasy football? Who would we start this week?

The Wall Street Journal reported on the clumsy fashion at a media “availability” where President Obama and Chinese leader Hu Jintao issued ambitious statement on cooperation but took no questions, while exhibiting body language that seemed to say they had been frustrated by the entire exercise, and they did not address each other. “Mr. Obama expressed pleasure at China’s longstanding pledge to move toward a more market-based exchange rate over time, something Mr. Hu didn’t mention.”

With the Chinese government growing restless, some day soon the federal government won’t be able to keep interest rates artificially low. The dollar’s falling sharply relative to other currencies is an ominous sign. In the marketplace people can move to a new vehicle, since Mr. Bernake has punished all savers. There is growing distrust of America both internally and externally. Mostly about this fantasy money.

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1 Comment »

  1. Comment by baseball91 — October 7, 2011 @ 2:28 PM | Reply


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