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| So how are my stalks doing today? |
I know numerous people who cultivate soil, seed
vegetables or grain, nurture the crop they’ve planted and harvest the results.
They trade their potatoes, tomatoes, wheat or canola for cash and the buyers are
fed and the grower is able to feed and clothe his/her family. It’s a happy
exchange. Everybody benefits. It’s how economies are supposed to look.
I
also know a few people who spend a great deal of time at their computers,
following the current value of investment packages, hoping to enrich themselves
by selling stocks, bonds, derivatives, gold, foreign currency etc. at a higher
price than they paid for them. Their activity produces nothing useful to their
neighbours while having the power—given any crisis that leads to panic
sell-offs—to bring an economy to its knees, including the crippling of growers’
and consumers’ legitimate ability to trade for food in a workable manner. It’s what
an economy should NOT look like.
Given
the news of economic doom and gloom in the USA and Europe with which we’re being bombarded daily, I’ve tried to understand some of the underlying
principles at work here. I began with derivatives,
a word one hears constantly but only speculators generally understand. It works
something like this:
A
farmer plants, say, 100 acres of lentils but he can’t be sure that hail, early
frosts, pests or drought won’t mean that the crop will fail. So to reduce the
risk of loss, he finds a speculator who agrees to pay him, say, $15,000 for
that crop on October 1, whatever crop comes to fruition. They sign a paper to
that effect.
Now suppose that this same
speculator makes similar deals with 100 other farmers, betting that the canola
crops will come in at a higher value than the derivative agreements he has made. The speculator is assuming an
awesome risk; if the crops are all wiped out by disease, he’s bankrupt. If
there’s a bumper crop, he’ll be an overnight millionaire, of course. To reduce
HIS risk, he packages up the agreements and finds other speculators willing to
bet on a good crop. He sells bundles of derivatives
to these new speculators for the equivalent of, say, $16,000 per 100 acres so
that should some of the crop fail, his losses will be minimized.
There’s
potentially no end to the ways derivatives can be repackaged and resold. What
has been erected here, however, is a house of cards. Follow the bouncing ball:
if all the canola crops in question should fail, the individual farmers will
call in their $15,000 per 100 acre payments; but in order to meet that payment,
the buyer of the farmers’ derivatives
will need to collect from those to whom he has sold them and so on up the
chain. But there is no crop for anyone to resell, and so the chance that payment
will actually work its way down the chain to the farmyard is minimal, depending
on the final holder of the derivatives.
No one up and down the chain is required
to back up his purchases of derivatives
with actual money! The house of cards collapses, naturally.
In
the USA, the “lentil crop” consisted of bundles of below-prime mortgage
agreements that “got hailed out” because thousands upon thousands of mortgage
holders defaulted. We all know what the fallout looked like: banks faced
failure, companies dealing in the derivative market went belly up and taxpayers
had to rescue American banking institutions lest the very core of the financial
system should be forced into receivership.
A
real, smoothly-working economy would have eliminated speculation entirely,
either by prohibiting it or taxing it to the point where it becomes uninviting.
But it’s
hard to imagine how that could happen. We are so attuned to the gambling temperament
by now that eliminating the prospect of unearned, windfall rewards in the
marketplace would kill investment outright and quickly. And once you’ve decided
to live in a casino, you apparently have to play by the rules of the casino.
Pity.
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