Saturday, December 10, 2011

What the Sam's Hill is going on??

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.

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