Boston Globe Article: Financial Doomsday Machine

This machine, which Elaine Meinel Supkis calls the Derivatives Beast, is threatening to undo the whole entire global economy. At its peak valuation, it was valued at more than one quadrillion dollars.

Globe Article:

If government doesn't do more, and fast, this could be worse than the
1930s. Why? There are three big reasons: [Ed-M: HAHAHA. As if the US Gov't, head over heels in debt and promises that will create more debt, can break this downturn without causing China et al to dump our foreign-held debts. The problem was practicing Keynsian Economics (deficit spending, a little inflation) without any
Anti-Keynsian economics (surplusses, a little deflation) for almost 65 years except '69 and '99, running trade deficits galore, and failing to stomp on bubbles with both feet when they first begin to form!]

Finance: A Doomsday Machine. The financial system is in far worse shape than it was when the stock market crashed in October 1929. In the 1920s, there was a stock market bubble, mainly because people could play the market "on margin," borrowing to invest in stocks. There were also scams like the original Mr. Ponzi's. Like in the present decade, the Federal Reserve helped to enable the game, with low interest rates and few rules. [Ed-M: So did the bank of Japan! It has run Zero Percent Interest Rate lending since '95 fer cryin' out loud. Result was the whole freakin' PLANET was awash in easy credit (read: cheap money for the asking!) and ended up in various bubbles, like the dotcom bubble, the housing bubble, and the recent commodities bubble, which, when it burst, cause the price of all commodities except precious metals to plummet.]

But today, thanks to "securitization" of loans and the ability of insiders to create exotic and unfathomable financial instruments, the speculative system makes buying stocks on margin look like child's play. In the aftermath of the crash of 2008, the process of sorting it all out and getting banks functioning again is something that markets simply cannot do. We are not even clear who owns what. The wise guys on Wall Street invented a doomsday machine from which there is no market escape.

In 1929 when the stock market crashed, the banking system was relatively healthy. Bank customers played these speculative games and took the losses, not banks. This time, the banks drank their own Kool-aid. [Ed-M: Here Mr. Kuttner gets it right! Bravo! Decades from now, if we're not all DEAD or back in the Stone Age by then, we'll be analysing what went wrong and exclain, "How could those banks be so colossolly stupid as to buy and sell credit default swaps, normal and 'synthetic' CDOs, MBSs and the like to and from each other?" Well it's easy. The computer whizzes who invented these things had to please their gnomish bosses! Who only wanted to get (more) rich.]....

Roosevelt was said to be a big spender, but his biggest peacetime deficit was only about 6 percent of GDP. This year, the deficit will exceed 11 percent, and the recession will deepen all year. It took the truly massive deficits of World War II - nearly 30 percent of GDP - to finally end the Great Depression. [Ed-M: Actually the Great Depression ended in 1939, when the European factories went to producing all armaments, forcing Europe to import consumer goods from US!]....

During the bubble years, the foreign borrowing disguised domestic weaknesses, such as our much-diminished manufacturing sector. For now, foreigners are still willing to lend us vast sums, but that may not continue indefinitely. [Ed-M: And CHINA, the biggest holder of our debts, has already expressed concern over our overspending. Won't be long now...]

Happy Lost Decade, everyone! May we NOT utterly collapse into a Stone Age, or kill everyone off in a thermonuclear WWIII, wherein the heavens would disappear with a roar, and the elements melt with fervent heat, and the Earth and all the works therein get burnt.

Citi Pirates' Group

I just thought I'd make a commentary about the Citigroup Gnomes boarding the good ship United States (still piloted by Bush, Paulson and Brenenke) and making off with $25 bn additional plunder with promises to come back and plunder $306 bn more in the future to "cover their losses" from their bed derivatives bets so they won't get devoured by the Derivatives Beast.

For now, a cartoon.

Looks Like Peak Oil is History, or Imminent

Graph credit:

World Oil Production in IEA's Reference Scenario (IEA WEO 2008 Slide 8) Source: (pdf)

From The Wall Street Journal Blog

Peak Oil: Get Ready for the Oil-Supply Crunch, IEA Says

Lower oil prices these days are both a result of the economic slowdown and a possible cushion. But they could be a very mixed blessing. The Paris based International Energy Agency is worried about an oil supply crunch in coming years. It’s not due to geology—the IEA says the world has plenty of oil, in one form or another. But trying to match oil supplies to growing oil demand in coming years is a Herculean task made all the harder by cheapish crude prices which make oil companies think twice about new investments.

The biggest challenge will come between 2010 and 2015, the IEA says in its 2008 World Energy Outlook. For the next couple of years, the oil pipeline is well supplied. But that trails off after 2010. By 2015, the world needs to find an additional 7 million barrels per day of oil above and beyond the projects currently in the pipeline. And to get that oil to market those projects need to get started now. But now’s not a good time . . .

From The Oil Drum:

Unfortunately, recent market events, only indirectly related to oil, will now likely set July 2008 in stone as the date of maximum world oil production, despite the 'best-best case' scenario portrayed in the IEA report. Up against near double digit depletion rates and higher cost (lower energy gain) prospects, the oil industry now also faces a growing lack of confidence in the international financial system where near herculean investment is needed ($26 trillion = 37 times the recent controversial $700 billion bailout package in US), and credit, especially when the price of oil is well below the marginal cost of extraction (at 86mbpd) makes approving new projects, let along continuing existing production, problematic. Though not explicitly stated, one may infer that there is now increased risk that these investments will not be made.

And where are we going to get $26 Trillion to eke out a peak in 2030 when our economy is being killed by a credit crunch that itself is being caused by the just-barely-beginning-of-the-unwinding of over ONE QUADRILLION DOLLARS IN DERIVATIVES?!?! Even more so, when the price in oil is being hammered daily by the collapse of the commodities bubble, which so recently caused great inflation in consumables (food, fuel, etc)?

Looks to me we won't get peak oil in 2030, but much, much sooner due to lack of investment using credit (debt).

Over One Quadrillion Dollars in Derivatives

That is greater than the value of all things on Earth.

The unravelling of these derivatives could eat up all wealth.

And the $700 billion bailout now before Congress will be a joke if this derivatives bubble were to suddenly burst.

http://www.gold-eagle.com/editorials_08/demeritt061608.html

The Bank of International Settlements recently reported that the amount of
outstanding derivatives has now reached the $1.14 quadrillion mark ($548
Trillion in listed credit derivatives plus $596 trillion in notional [or face
value] OTC derivatives)....

Derivatives, as you may know, are essentially unregulated, high-risk credit bets. Unlike the earnest farmer who might employ a futures contract to hedge the price of the beans he’s worked so hard to grow, many of today’s institutions use futures, forwards, options, swaps, swaptions, caps, collars and floors—any kind of leverage device they can cook up—to bet the hell out of virtually anything.

What drives derivatives, at their very roots (if you can somehow get back that far), are base assets that get leveraged to a demented degree. Martin Mayer writing for the Brookings Institute, said, “the receiver of the payments on these loans or securities has bought the securities for the duration of the swap on 95% margin, even though the law says nobody can buy securities without putting up half the price.”

Extrapolated, $1.14 quadrillion in assets “owned” on something like 95% margin has to be one of the scariest phenomena in economic history....

Eventually, shockingly, something will happen. Some bank will slip up, some mathematician will miscalculate or the Fed just won’t react fast enough, and the whole [$1.14] quadrillion derivative complex will come tumbling down around our feet. Only it might not be [$1.14] quadrillion by then. It might be a whole lot more.