Monday, May 11, 2009

Speculation, the economy and you....

If you have seen the 2 videos, you may be wondering what is the point of this posting. The 1st video shows how money is created, the 2nd video shows the US Federal Reserve is able to create trillions in new money. The 3rd part is an article by Larry Haverkamp (aka Dr. Money) a columnist with the New Paper : [Link]. An extract from his article:

"US$200 trillion in world wealth is small compared to the new centrepiece of this recession: derivatives. They are US$1,232 trillion, which is - get ready - US$1.232 quadrillion. A quadrillion is 1,000 trillion, or 1 followed by 15 zeros........looking at the value of all derivatives. As explained, it stands at US$1,232 trillion, which is six times the US$200 trillion value of the world's wealth." - Larry Haverkamp.

Analogy is something like this : soccer is a game that many love and players earn their income by entertaining the fans, clubs earn money selling souveniors, ticket sales, TV broadcast rights etc. At the side, another game take place - soccer betting. Suppose the betting game grows and the money involved in betting on soccer games become larger than the money generated by the game itself. What happens? The players in the second game start to try to fix the actual soccer game and influence the outcome.

In the past, the amount of speculative money in the financial markets is a small fraction of the total wealth in the world. A small amount of speculation is good for markets because it helps to make markets liquid and more efficient. But through leverage and use derivatives the total amount of money used for speculation has grown to an amount several times the total wealth in the world. The 2nd game - that of speculation in the financial markets - now has great influence over the actual economy. Speculators acting in herd-like fashion can create a recession by betting that there is going to be one. During the Asian Crisis, Dr. Mahathir was ridiculed for calling currency speculation 'evil'. ..he was laughed at for trying pin Malaysia's economic woes on someone else and also for being a naive authoritarian who couldn't understand and accept the natural outcome capitalism. Looking back weren't those speculators attacking the ringgit causing a loss of confidence that made investors flee thereby bringing the Malaysian economy to its knees. ...that was downright different from the Somali pirates who hijack ships for a ransom.

Why is all this important? We, the good people of this earth, study hard, work hard and obey the law yet our lives can be disrupted and even ruined by people whose activities are unproductive and unbeneficial to society...whose goal is to line their own pockets with money.


If you watched the earlier video, you might want to watch this video in which the US Inspector General is questioned about the Federal Reserve...listen to it carefully.

A small but growing number of Americans are calling for the Federal Reserve to be shutdown and the ability to 'create money' put back in the hands of the US govt. Given the current crisis can be traced back to the actions of the Federal Reserve under Alan Greenspan and over-leveraged banks, Americans are beginning to ask if the entire system is rigged so that while ordinary citizens work like slaves servicing their debts, another group of people just sit around creating and lending money earning interest and manufacturing inflation that eats away the savings of ordinary folks. ....


Anonymous said...

Hey lucky, what do u think?

Let me talk, I may be totally wrong.

Fractional reserve banking to control money supply is good, because u only expand your money supply when there is a need. i.e. When people have worthwhile projects that need loans.

Also the us govt can safely pump trillions into the finance sector to prop it up, without instantly causing massive inflation. The money does not get out of the bank. Inflation may come later when the banks start lending it out.

Imagine what would happen if they really expanded money supply by dropping trillions of dollars of cash from helicopters. said...

systems have to be tweaked in accordance to the changing demands of times.

Ghost said...

I disagree with people who blame Alan Greenspan for this problem. The man was retired for over a year before the market when into meltdown. The US had plently of time to fix the problem if they though he did something wrong. They didn't and blaming him now is a little rich, especially when everyone in the US was treating him as a messiah when he was in charge.

Anonymous said...

Hi Lucky,

Your explanation to the dual of a game is good. very logical. The players of the dual game will kill many players of the actual game. So how?
By the way, PAP is a sneaky player in the dual game even if it's not supposed to as a government for people.

Rialce said...

To Ghost
I agree with you that Greenspan should not be blamed...alone, he alone can't do anything. It is a team's thing. Another point I would like to add is that a year isn't enough to change things; afterall, it took many years for this bubble to build up. Maybe 5 years isn't enough, the Great Depression took about 11 years. The system put in place had a momentum too large to overcome, and I think the policies that came up to deal with this currrent crisis don't deal with the problem itself, it only cure the symptoms-Krugman said it himself. And the reason why policy makers do not target the main problem directly-I think most of the ecconomists know why-they don't dare to do it.It is too painful and dangerous.
To Lucky
Be it in the past, present or future, the rich will always find a way to enable them to get richer, and in the end the poor will get poorer. I guess we can't change this fact; however, we can put in place social safety net to help the poor by providing them with proper neccessities such as food, housing, health care and education.

Anonymous said...

If I can remember correctly,Bank Negara was one of the biggest operator under Mahathir's watch. It was when they were burnt when he deriled speculation. They had it good in the beginning when they muscled their way around, being one of the first upsized SWF, only this one doesnt invest but punted heavily. Derivatives itself has its purpose, only thing is when the emergence of hedge funds turn this into a game, and turned into the state we are in now.

Anonymous said...

So is the worst yet to come? Or is the bottom reached and things will only get better?

But whatever it is, PAP will still be the gahmen in Singapore.

SIngapore will also be very peaceful. This I am very sure.

Kerk said...

I like both the videos.

Let's talk about the first video first. It's straightforward that no one is in check of the banks and the fed does have a clear clue of the whole situation of its own balance sheet. In short, they may know the pie, but not the parts of that pie.

Should there be another institution acting as the "senate" on top of the central bank "the house of representatives" , so that each can keep the other in check?

As for the second, we don't really have to argue this. It's quite straightforward. Even though people hate debt, it creates economic growth and jobs and wealth. The problem is just about having the correct proportion of debt.

Having an independent institution to control the money supply definitely beats having the government to control the money supply.

It keeps the government in check. It has the economists doing the controlling, and not politicians controlling the money for self interests. Therefore, it is for the benefit of interests and expertise that we do not take away the central bank.

However, some countries still have a politician as the chairman of a central bank. You know which one I'm talking about. Your guess is as good as mine.