On Fake Bonds, Owning Gold and the Inflation vs. Deflation Debate

I would not say I am in a foul mood. I mean between the endless cloudy days, rain, and low temps why not feel a bit down. I think it is something else. Ok, I think I am in a foul mood. Combative even. Here at Economic Disconnect I try to look at all kinds of things all kinds of ways and besides for some very pointed comments aimed at Paul Krugman and Bill Gross, I give fair weight to any and all ideas, arguments, and viewpoints. Well today I think I have about had it on many fronts, so this post may be a bit more edgy than normal and I hate that. But here it comes regardless.

Bearer Bonds Story - A Waste of My Time as I was "Snookered"
There were plenty of developments in the story of the 134 Billion Dollars in US Bearer Bonds Thursday, so we will start there.

First off, the bonds have been declared fakes as the Treasury informs us:

June 17 (Bloomberg) -- U.S. government bonds found in the false bottom of a suitcase carried by two Japanese travelers attempting to cross into Switzerland are fake, a Treasury spokesman said.
“They’re clearly fakes,” said Stephen Meyerhardt, a spokesman for the U.S. Bureau of the Public Debt in Washington. “That’s beyond the fact that the face value is far beyond what’s out there.”

So there is that. As Karl Denninger noted:

Ok, let's accept both parts of that statement (yes, there are two) at face value:
The "bonds" seized in Italy are fake.
"The face value is far beyond what's out there."
The latter is exactly what I noted is out there in authorized issuance in my second story on the matter:
Mr. Holmes would be initially puzzled by such a caper. On the one hand we have the impossibility of the bonds being real, because there simply isn't $130 billion of issues remaining outstanding.
As it turns out, the Bloomberg update tells us something surprising:
Meyerhardt said Treasury records show an estimated $105.4 billion in bearer bonds have yet to be surrendered. Most matured more than five years ago, he said. The Treasury stopped issuing bearer bonds in 1982, Meyerhardt said.
$105 billion? Uh, that's a lot more than the DTC estimates I've seen, which were in the area of $3.5 billion outstanding! Suddenly there's thirty times that on deposit with the DTC out there according to Treasury? This also leaves the second part of the question open:
On the other hand we have the impossibility of negotiating a fake $500 million bearer instrument, making the exercise of counterfeiting one expensive and futile.
Finally, what happened to the two gentlemen caught with them?
The latter is a rather important question, I'd think. See, counterfeiting is a serious offense. Just try printing up some fake $100s or $20s and see how amused the Secret Service is (hint: don't try this at home unless you are interested in a free stay at Club "This Ain't Fun" Fed.)

So the Treasury reports that there are 30X more bonds than previously thought out there somewhere, but still less than the $134 Billion amount found on the two guys. So they are fake.

My interest in this story was due to to the obscene amounts being reported. I was never of the opinion that these things were undeniably real, but there was that possibility. The story has so many angles I found it compelling reading. Add to this that it seems the Sicilian Mafia may be behind the bonds and this tale is still a great read. That the treasury has now disclosed the 105 Billion amount was another thing I wanted to come out of this caper; just how many of these things are out there?

But it seems I was wasting my time. One of my most respected bloggers and inspirations to write this blog is the author of Calculated Risk. On a few occasions I have emailed CR asking to use his charts, and he has always been a great help. I was a bit bemused to see CR finally post this about the bond story:

Some mid-day amusement ...
This was funny ... I never posted on this, because it was pretty clear there wasn't any real story. Maybe the post should be titled: "How some blogs were snookered!"
But a false bottom in a suitcase?

Now I would venture that CR really means the blogs that were writing things like "Bonds are real, US is toast" and such things, but really I took the dig a bit personal. I felt, and continue to feel that this story has real merit. If the mafia is using bonds like this on this scale, just who is buying them? How does this fake money relate to the troubles countries under strong mafia influence (think EASTERN EUROPE) have been having financially? There are plenty of stories here, but move along as forgery of US debt instruments on a massive scale can never cause any issues worth paying attention to.

Jobs Numbers and Moving Goalposts
I am not going to parse the jobs numbers, they are still terrible. But hey, they're getting less terrible at better rates, so that's nice. On Thursday my favorite economist who shall remain nameless offered that for unemployment to stabilize and to call the end of the recession, the initial jobless claims will have to come down to -400,000. Thursday's print was over -600,000. A few years back this guy was railing because employment was only GROWING at about +300,000 jobs a month (a positive 300,000) and said that was not even enough to support workers entering the job force. But now losing 400,000 a month will be just so great. That 700,000 spread is hard to reconcile, but he does have a Nobel prize.

Gold on its Way to Zero; At Least the Top Will be in for "Gold Stinks" Stories
As gold continues its path towards a new range of 0-$10 an ounce at least I will be spared the avalanche of "gold stinks" stories because nobody writes about anything when it is at zero. We know that gold is going to be worthless in an upcoming metal route because it is going to be sold in gram quantities in ATMs. Also, I find the reasons set forth by this author, on Minyanville no less, so persuasive I have to share them with the readers right this second:

Five Reasons Not to Be a Gold Bug
The arguments for why you should sell your cat, pawn your mother-in-law, and use the proceeds to buy gold are well known: The friendly Fed is printing money faster than you can read this; it will result in inflation; the government is borrowing like a drunken monkey; the dollar will be devalued; all currencies will be debased; the only thing that will save you is that shiny yellow metal, and so forth.
Here are some arguments, however, for why you should think twice before jumping into bed with gold bugs.
1. For investors (not speculators), it's very hard to own gold because they can't put a value on it. Unlike stocks or bonds, gold has no cash flows, and has a negative cost of carry (meaning, it costs you money to hold it). It's only worth something if people perceive it to be worth something.
2. GLD ETF (GLD) is the sixth largest holder of physical gold in the world. If its holders decide (or are forced -- think hedge-fund liquidations) to sell it, to whom will they sell it?
3. In the past, gold had a monopoly on inflation and the fear trade -- not anymore. Now you have newly emerged competition from TIPS, currency ETFs, short US Treasury ETFs, and so on.
4. If gold fails to perform because of reason number 2 or 3, the perception that gold is worth something may be violated.
5. Over the last 200 years, gold wasn't really a good investment. It may yet have its day in the sun, but it also may not. The cost of being wrong is pretty high.

Oh my god, that was some powerful stuff. I mean the reasoning is so solid we could even take another look at it and be awed by the sheer brilliance.

Number 1 is hard to argue against:

For investors (not speculators), it's very hard to own gold because they can't put a value on it. Unlike stocks or bonds, gold has no cash flows, and has a negative cost of carry (meaning, it costs you money to hold it).It's only worth something if people perceive it to be worth something.

Now this one really opened my eyes. Something only has a value based on perception? Who knew? All those houses in Phoenix Arizona that were selling for $400k in 2005, and now sell at $150k was is based on cash flow? Did the price/rent ratio get skewed that bad in that time?

So you say stocks and bonds can be valued by cash flow? Is GOOG trading on its cash flow? No? Is it trading on what people perceive some future cash flow may be should GOOG ever really be able to monetize eyeballs? Nah. GOOG is always trading at cash value no doubt. How did the S&P ever get to 666 when the cash flow models were so much better? Who knows, but gold is dead. Great argument.

Number 2 is as mind changing as number 1, only less so:

GLD ETF (GLD) is the sixth largest holder of physical gold in the world. If its holders decide (or are forced -- think hedge-fund liquidations) to sell it, to whom will they sell it?

I had never really considered this. For every sell there is a buy, except when gold is sold, then the buyers fail to materialize. I mean, when all that toxic mortgage debt had no takers, the government took it all in. They were the buyers of last resort. I do not think uncle SAM has any need for gold though, so in a forced liquidation gold would have to go to zero, no negative whatever the carrying costs are, in order to be moved. I guess GLD is crap out of luck on this one.

Number three may make you want to sell your wedding ring, so be warned:

In the past, gold had a monopoly on inflation and the fear trade -- not anymore. Now you have newly emerged competition from TIPS, currency ETFs, short US Treasury ETFs, and so on.

Brilliant. I had never considered that if the US government printed so much money that they were forced to debase the dollar and hyperinflation occurred that I could simply buy more debt instruments, backed by the full faith and credit of the US, to offset that inflation. Amazing. I read that Zimbabwe made their TIPS holders whole, even at 1000% monthly inflation. This is sooooo simple.

Number 4 just scares you with what the writer already said:

If gold fails to perform because of reason number 2 or 3, the perception that gold is worth something may be violated.

Hard to argue with that. Performance anxiety is an issue for all of us.

Number 5 is a summary:

Over the last 200 years, gold wasn't really a good investment. It may yet have its day in the sun, but it also may not. The cost of being wrong is pretty high.

Obviously, if your investment time line is 200 years you need to stay away from gold. It is far better to go with tulips (think dividends) and cabbage patch kids (think rarity) when planning for the long term.

Very convincing stuff.

Full Disclosure: Long gold and silver and will be all the way to zero for each. As they fall I will simply dollar cost average in (as they suggest on CNBC) so I will be protected. Oh, wait......

Inflation vs. Deflation and the Limits of Rational Discourse
I think the inflation vs. deflation debate is an attractive thought experiment with far reaching implications. I will say up front I am pretty strongly in the "deflation now, inflation later" camp and that is no cop out. I never mince what I say or mean. I could care less about pleasing any audience by changing my opinions based on group think. I think the great debates and interactions featured in the comments section at Economic Disconnect have been some of the best, most civil, most accepting debates anywhere on the net. I appreciate all for their great ability to keep it intellectual.

That said, there has been a change in tenor from both sides of the debate as of late. Inflationists are calling deflation thinkers "dumb". Deflationists are attacking inflation types with terms like "blind", and "unable to see what is in front of them". This has to stop. We even have outliers in the "Stagflation" camp, though that one has moved to the "Negflation" outlook as of late, but he is a bit crazy anyways. (just kidding Mark)

To see why this debate is hard to reconcile, we should start with the clear fact that NOBODY EVEN AGREES WHAT THE DEFINITIONS ARE for inflation and deflation. Some point to money supply, others to prices paid, and others to random data points.

I would like to put out an idea I have been working on that may help many of us get onto the same page. I have not fully developed this idea, but I thought it would be good to get it out there and get some feedback. Perhaps deflation and inflation proponents are closer in view than they know. Consider:

Classic Inflation Definition: Tons of "cash" (whatever iteration) chasing too few goods pushes prices up. How that cash was made (money supply, easy credit, etc) is not central to the argument. Many cannot keep up and hardship occurs due to lack of ability to buy needed goods/services.

Classic Deflation Definition: Money supply (whatever iteration) normal or low but not being put into purchases of goods, causing prices to fall. This reinforces the pattern and a spiral down ensues that causes hardship through various channels (loss of job, loss of equity in home or investment etc) which feeds itself.

Yes simplistic, but remember I am the easily "snookered" type. (Still burns.)

Now consider:
In inflation (be it regular or hyper) you have ever increasing asset values, but the pace of increases of all the things you need are going the same rate or faster. You either go nowhere or fall behind.

In deflation (I think there is only regular) asset values are falling which destroys the equity in them, decreasing money supply as debt is defaulted on. Everything falls in price INCLUDING YOUR WAGES, hence you are chasing necessities that are falling in price, but your assets are worth less and your paycheck getting smaller. You either go nowhere or fall behind.

I think the core issue to think about is how much relative income you have that will have to chase relative prices and here I think the two views are more alike than previously thought.

Again, this is a theorem in progress and I would ask all readers to offer their ideas in the comments section. I value your opinions and I think this thing has some merit. Or not. Leave a comment anyway.

Comments

[Economic Di...:]

NathaielC,
excellent observations and the perfect argument on why intervention is a waste of time and money.
Whippet,
yeah that article really set me off. TIPS as a great buy? Based on government stats? When inflation was running at 10% plus for 2003-2006 the CPI as reported never broke 4%.

Great interaction all, I appreciate all the comments.

Jun 19 05:41 PM

[JeffDB:]

On Jun 19 03:51 PM Nathaniel C wrote:

> My friend said that if you simply reduce the price of your house you will get numerous interested buyers. The market is trying to adjust house prices, but the Fed keeps trying to fight it by propping up asset prices. Why not let the market solve the problem?
-------

I completely agree. I've spoken with people complaining that there were just no buyers for their home and I noted that if they cut the price enough the buyers would be all over themselves trying to buy it. They agreed as it is pretty obvious, and some others jokingly offered $100 dollars on the spot, but the point is real. A friend of mine was selling a home in an area with declining values and "few buyers". He fixed it up nicely, priced it per a real estate appraising class he had taken and then put up a couple of for sale by owner signs and an ad in the paper.

He had a number of people coming through his first open house when one quickly offered to buy it. Another guy next to him offered a premium over the asking price.

Had he priced it 20% higher I'm sure he would have been lamenting like everyone else that there were a lot of lookers but no buyers.

It's all about the price.

Jun 19 06:58 PM

[Economic Di...:]

Post on my blog will be up at 8pm EST.

Jun 19 07:02 PM

[TwiceShy:]

On Jun 19 11:46 AM ejhickey wrote:

> ... Therefore
> there is no danger of inflation since the money has not gone into
> the economy and the banks are not lending it out. ...
>
> I still have a nagging question? Why was the money supply increased
> if it is just sitting in the banks and basically acting like a Linus
> security blanket? ...

Over the past decade or more, the enormous increase in highly leveraged derivative bets (to the tune of orders of magnitude more than total world GDP) massively inflated the money supply. That, more than anything, was the source of the "new" credit-debt created money used to fuel the various bubbles the world economy experienced during that time. It was extremely inflationary. Last year, when Lehman was allowed to fail, all of that leveraging began to unwind and some of the credit-debt created paper wealth based upon it was destroyed, sucked into the derivatives black hole never to be seen again. That was extremely deflationary. The Fed, by creating trillions of dollars of new credit-debt based money and "loaning" it to those who "needed" it to cover their highly leveraged derivative bets that had come due, was able to temporarily fill the void created by that destruction of paper wealth but the black hole is still there and the money that has been sucked into it will never come out again (it was simply replacing money that had already been destroyed). As the Fed dilutes the value of every other dollar in existence (just as a company dilutes the value of its shareholder's shares when it creates more to sell, with no additional assets to cover them) to cover ever more of the paper wealth destroyed as the massive leveraging upon which the world economy is currently based continues to unwind, that sucks ever more wealth out of the economy (as seen by the rest of us) and into the black hole of derivative losses. What we are seeing isn't inflation -- because the money supply isn't expanding, it is still contracting -- it is simply a massive transfer of wealth from the rest of us to those who seem to believe that the rest of us should pay for their foolishness by covering their bets and making them whole. They are compulsive gamblers begging, borrowing or stealing ever more from the rest of us to cover their losses, so that they don't have to actually realize their losses and lose their place at the table.

Jun 19 09:28 PM

[Fighting Yoda:]

Banks are getting paid interest on surplus reserve, as per the new Fed rules.

Banks are back to 101 banking - won't lend to questionable businesses and low credit borrowers.

As per Fed data - private credit collapsed 1.8 Trillion in the first quarter of 2009, bank lending decreased $856.4 billion (annualized).

Inflation can come with either demand pull - rise of nominal wages (wages are falling), or cost push -commodities rise etc. Prices of commodities have rebounded recently - but they are only a very small part of the cost of production. 70% of cost of production is labor, and commodities are only a small part of the rest 30%. So no inflation to be found anywhere.




On Jun 19 11:46 AM ejhickey wrote:

> If I understand the anti inflation theory correctly, it goes something
> like this. Yes the supply of money has increased dramatically but
> it has leveled off even though it has not gone down. Therefore therefore
> there is no danger of inflation since the money has not gone into
> the economy and the banks are not lending it out. And the Fed will
> withdraw or soal up these funds at the appropriate time when the
> economy gets better.
>
> I still have a nagging question? Why was the money supply increased
> if it is just sitting in the banks and basically acting like a Linus
> security blanket> And if the banks are not lending out a lot of money
> for whatever reason. how are the banks making money? Do the banks
> simply look better because the accounting rules were changed to let
> the banks re-value questionable assets according to some secret formula?

Jun 20 09:08 AM

[John Bowman:]

Thanks, twiceshy for the explanation.

You know, I never understood derivatives, CDOs, hedge funds and the like. But maybe the mystery and complexity of them is what makes them really bad for the economy.

To me, they are nothing more than a form of gambling and add nothing of value to a country's GDP. It's a shame that since very little is produced here that these type of shady investments are the ones which many people, banks and instititions desire.

Jun 20 10:11 AM

[H. T. Love:]

Obviously PETA has become of the "slippery slope" theory. Next is the spider, then the mantis and next thing you know its the aphids.

We must nip this presidential disregard for the sanctity of "lesser life forms" in the bud!

Oh, yes. It's obvious they are too late.

HardToLove
On Jun 19 11:36 AM Larry House wrote:

> Thanks for a lot to think about. Are you trying to get PETA after
> you, talking about a drunken monkey? They have even come to the defense
> of the fly the president killed. What a crazy age in which we live!

Jun 20 11:35 AM

[The Geoffster:]

Inflation is inevitable. How else can we possibly retire the debt?

Jun 20 11:44 AM

[H. T. Love:]

"It's these companies that will be able to raise prices during inflation, and thus remain profitable."

Well I'm new and not too bright sometimes, but I think I want to own companies that will be able to raise prices during ...

DEFLATION! That's *real* profit making potential there!

Considering historical buying patterns, buy only companies that receive the majority of their revenue from the U.S. Government. Specifically, toilet seats, hammers, open-ended weapons-development contracts (guaranteed good until a change in administration presents an opportunity for criticism of the previous one), etc.

On Jun 19 02:43 PM Whippet wrote:

> Beautiful. A plus.
> My favorite part of that ridiculous Minyanville trash, after he was
> through trashing gold: "The best solution to deal with the risk of
> dollar devaluation and high inflation -- and the one with the lowest
> price to pay if you're wrong -- is to own the stocks of companies
> with pricing power. It's these companies that will be able to raise
> prices during inflation, and thus remain profitable. Additionally,
> companies with a large portion of their sales coming from outside
> the US will benefit from the declining dollar."
> Ya know, companies like ExxonMobil, Archer Daniels Midland, Altria.
> Companies that would never be attractive targets for "Windfall Profits"
> taxes. Companies with no risk of Liberal Fascist Nationalization.
> Companies beloved by all Americans. Brilliant!
>
> On Jun 19 11:46 AM ejhickey wrote:

Jun 20 11:48 AM

[H. T. Love:]

On Jun 19 05:41 PM Economic Disconnect wrote:

> NathaielC,
> excellent observations and the perfect argument on why intervention
> is a waste of time and money.
><snip>

It's "a waste of time and *our* money", but not of the Fed's. They are accomplishing exactly what a privately-held for-profit institution wishes - increasing *their* wealth, power and influence as central banks have done throughout history, at the expense of the people and governments with whom they are involved.

My Humble Opinion,
HardToLove

Jun 20 11:56 AM

[H. T. Love:]

ROTFLMAO at the rapier wit on the gold piece! That part about the gold sounds like a Jeff Mackey(sp?) rant.

If you ever get tired of doing what you're doing now, I believe you make an excellent "satirist". If you aren't going to tire of this, please ...

Awaken in a foul mood more often. We need more good wit and humor!

HardToLove

Jun 20 12:02 PM

[tc1:]

John Bowman and twiceshy:

A really excellent, vividly in-depth yet article-length (not book-length) revelation of what went wrong with the multi-headed beast of toxic "securities" that created the GIANT VOID at the now-imploded heart of our financial sector is Michael Lewis' well-told story, "The End," in the Dec. 08 issue of the now defunct Conde Nast Portfolio. Yes, Portfolio is no longer being published as of this month, but the Lewis' article is still at their website. It's really worth downloading soon to a Word file or printing it.

For a much longer treatise on this topic, see William Cohan's book House of Cards, among the several books that have already emerged.

But Lewis, drawing mainly on the views and experience of dissident Steve Eisman and his colleagues, will give you quite a lot of details in what is just a 10-000 to 15,000-word article.

Jun 20 12:51 PM

[Swiftcreek1:]

Bingo.....Now if we could just convince the general populace that the idiots in Washington DC are the PROBLEM and not the solution we might actually get somewhere.


On Jun 19 03:51 PM Nathaniel C wrote:

> People fail to distinguish between asset deflation and general price
> deflation. Very big difference. The financial elite who own assets
> are mad as hell that the price of their assets are declining and
> want the fed to cause inflation by printing money and debasing the
> currency to increase the nomial price of their assets.
>
> While assets prices are declining, general prices in the economy
> are not. Go to the grocery store or the gas station to figure this
> out. Are prices declining? Is oil going from 147-72 price deflation
> if the price of oil was $10 in 2000. Seems more like perpetual inflation.
> Education, healthcare, food, and energy prices are still going up.
> The only thing that seems to go down in price is plasma screen tv's.
>
>
> The term deflation relates to general prices in the economy as opposed
> to asset deflation. Asset deflation is a NATURAL part of capitalism
> and follows asset price bubbles (like housing etc). However people
> fail to understand the difference between the two. The central bankers
> have brainwashed the public and financial community to want inflation
> and believe it to be a positive thing. Why? Because the US is the
> largest debtor nation in the world and can only continue to finance
> its debts by debasing the currency through inflation. Without inflation
> the US government ponzi scheme would collapse. So every time we have
> asset deflation the FED panics and starts printing money to debase
> the currecny and cause inflation to pump up asset prices. They argue
> that if they dont do this, the US will fall into a depression. They
> claim that the only way to "save" the economy is to have inflation
> (which is a loss in purchasing power). How is a loss in purchasing
> power of the US dollar a good thing? For the Fed it reduces the real
> value of the US debt and pushes up nominal asset prices and makes
> everyone feel richer.
>
> In conclusion, the US is facing asset price deflation not general
> price deflation. No need to debase the currency and print trillions
> of dollars. Just let the market correct by liquidating malinvestment
> and let assset prices fall to a proper level where buyers come in
> and stablize the market. Housing is a great example of this. The
> Fed is trying to pump up expensive house prices through inflation.
> This is misguided. A friend of mine who is a realtor told me that
> the housing crisis is not about people not wanting houses. The crisis
> is because house prices are massively overvalued and need to fall.
> My friend said that if you simply reduce the price of your house
> you will get numerous interested buyers. The market is trying to
> adjust house prices, but the Fed keeps trying to fight it by propping
> up asset prices. Why not let the market solve the problem?

Jun 20 12:54 PM

[Economic Di...:]

Great comments all.

Just a quick note, I am going to setting up a new computer so I may be offline for a bit. If I have nothing new by Monday you will know soemthing went very wrong!

Jun 20 01:21 PM

[MGA_1:]

You know, the bonds in the suitcase story is such a strange one I actually think they bonds may have been real. I mean, who would actually try to fake a $1 billion bond - like the bank isn't going to check?

Inflation/Deflation - in truth i've just kind of given up. I think the price of gold is the best estimate of inflation/deflation. Over 200 years awful investment - great investment in the 70's. Probably now too.

Jun 20 02:02 PM

[John Bowman:]

Wow..what a great read! The guy is an excellent writer..I am sending this link to a few of my friends.

Thank you so much for the enlightening experience!


On Jun 20 12:51 PM tc1 wrote:

> John Bowman and twiceshy:
>
> A really excellent, vividly in-depth yet article-length (not book-length)
> revelation of what went wrong with the multi-headed beast of toxic
> "securities" that created the GIANT VOID at the now-imploded heart
> of our financial sector is Michael Lewis' well-told story, "The End,"
> in the Dec. 08 issue of the now defunct Conde Nast Portfolio. Yes,
> Portfolio is no longer being published as of this month, but the
> Lewis' article is still at their website. It's really worth downloading
> soon to a Word file or printing it.
>
> For a much longer treatise on this topic, see William Cohan's book
> House of Cards, among the several books that have already emerged.
>
>
> But Lewis, drawing mainly on the views and experience of dissident
> Steve Eisman and his colleagues, will give you quite a lot of details
> in what is just a 10-000 to 15,000-word article.

Jun 20 04:25 PM

[Jimbo:]

Economic Di: I read that article on Gold at minyanville. I am growing alienated by much of the stuff on Minyanville. I am not a gold bug. I do own one Krugerrand and a modest stash of pre-1964 silver coins just in case we appoint that dude from Zimbabwe as the new FED chief. I have invested in two reputable mutual funds that are in several aspects of mining and minerals. I have to laugh every time I see a recommendation for TIPS. That's like betting at a casino where the owners can manipulate everything. I simply don't trust the federales to keep an honest accounting of the CPI.

Jun 20 05:54 PM

[Economic Di...:]

Jimbo,
I feel the same way!

Jun 21 12:24 PM

[TwiceShy:]

I don't think anyone, even and especially those who created them, truly understands derivatives (I certainly don't). The most significant thing I can see, from reading about them, is that they are a 1.6 quadrillion dollar ($1600 T) bubble that will eventually deflate (and look out below when it does). That began to happen last year until it was stopped by the Fed's massive trillion plus dollar loans to those who had to cover their bets to keep it from happening. I think that the risk that they may yet actually need to cover their derivative bets is the main thing making the biggest banks increase their capital reserves rather than loaning out more money.


On Jun 20 10:11 AM John Bowman wrote:

> Thanks, twiceshy for the explanation.
>
> You know, I never understood derivatives, CDOs, hedge funds and the
> like. But maybe the mystery and complexity of them is what makes
> them really bad for the economy.
> ...

Jun 25 10:15 AM

[ejhickey:]

There are some very insightful comments about this article. I think I have a better grasp of this problem. I will probably print out the comments to share with some friends .

Jun 26 02:17 PM