Understanding the $500 Trillion Global Money Mess

Illustration of Thor trying to drink the Giant's meade by Giovanni Caselli from 'Gods and Heroes in Norse Mythology'
November 23, 2007

Elaine Meinel Supkis

Time to talk about currency trading, the Japanese carry trade and the $500+ trillion in hedge funds and deals that loom over us like a giant mountain of debts. I compare charts of M0 and M3 money making by Europe, the US and Japan and compare them to China. World trade is becoming increasingly disarranged from the previous status quo of the last 35 years where the US is the final destination of all trade. The complex mess that is unfolding has been simplified by US commentators to the point that investors are totally conned whenever there is pathetic 'good news' such as people mobbing stores today seeking huge bargains as the Big Box stores in the US ruthlessly cut prices even as the price of oil and other necessities shoot through the roof. Inflation, meet the collapse in sales profits!

Yen Falls on Speculation Japan's Importers Sold at 2-Year High

The yen retreated from the highest in more than two years against the dollar on speculation Japanese importers are selling the currency to take advantage of a five-month rally.

Large manufacturers predicted the yen will average 115.20 against the dollar in the year ending March, the Bank of Japan's Tankan survey showed Oct. 1. That is 6 percent weaker than its current level. The dollar fell to an all-time low against the euro and the Swiss franc on concern the Federal Reserve will cut interest rates to prevent subprime mortgage losses dragging the U.S. economy into recession.

I put up this 2 day old headline to explain what is going on. First, the Japanese ALWAYS predict the yen will be cheaper in a year. No matter when this is, next year, it will decline. I often talk about magicians waving wands. This is typical wand waving. Chanting, 'The yen WILL be weak, the yen WILL be weak!' they chorus this in hopes of making reality conform. In the past, US and Japanese FX traders would respond by dumping the yen. Last summer, the Japanese boasted they could weaken the yen to 130 to the dollar. Just the other day, the yen became perilously close to the precipice of rising value when it rose to nearly 100 yen to the dollar.

This is the last thing on earth, Japanese explorers exploiting trade finance value differentials want. The sudden rise of the yen followed on the heels of the Chinese TV announcer telling everyone to buy yen. This is part and parcel of the ongoing currency war between China and Japan. In return, the frightened Japanese exporters, particularly Toyota, sold yen. Isn't that funny? They tried to swamp the Chinese buyers who, today, retaliated themselves. Up goes the yen! It is hilarious that the Japanese have trimmed their sails to the point of giving up on the 130 yen to the dollar and settling for a 114 level!

I would interpret this to mean, the yen is doomed to rise against the dollar for the next six months and will end up at 95 to the dollar to the shock and horror of the Japanese. While the yuan rose against the dollar, Japan got away with being weaker and weaker and enjoyed the world's biggest export market profits in the world. China noticed this and is correcting it since the US and Europeans refuse to do anything at all. Now, let's look at today's NYT article about Japanese investors.

Japanese Shift Cash Out of U.S. Investments

Starting late last year, however, Mr. Okudaira made drastic changes to his portfolio, putting $50,000 into mutual funds focusing on stocks in China and other emerging economies. He said he had been drawn to these countries because they seemed to hold much brighter growth prospects than the United States.

“People say the engine of the global economy is shifting from the United States to emerging countries,” Mr. Okudaira said. “Emerging countries have growth and energy that America and Europe lack. They remind me of Japan 40 years ago.”

Japan’s legions of individual investors like Mr. Okudaira have emerged as a global financial force to be reckoned with, directing almost half a trillion dollars of their nation’s $14 trillion in personal savings overseas in search of higher returns. Until recently, much of this huge outflow of cash, known as the yen-carry trade, had gone into United States stocks, bonds or currency, propping up the dollar’s value.

First of all, this is not the yen carry trade. I have agonized over how to express this carry trade business. This word is tossed about because it really has no definition, it is something FX traders and bonds traders use to express how they can conjure up huge sums of money for deal making. Long ago, I decided the 'carry trade' could not possibly be the flow of savings from Japan. Once again, I must look at other factors to see clearly, where this money is actually coming from. If it really were savings, we would see no real growth in the M0 or M3 funds yet this is obviously a fake story. It is NOT ANYONE'S savings that is creating this flood of money. Obviously, we would not be witnessing global inflation if this were based on a solid thing like savings.

So long ago, I determined this 'carry trade' was carrying away something else: the Bank of Japan and other central banks were printing money, so to speak, and then lending it at weird interest rates. They were all playing an interest rate differential game of tremendous size involving many huge economies and countries. When I decided this, I had to locate the engine of all this funny money and it had to be the one with the greatest differential, of course.

The champion was Japan which had the biggest differential of massive proportions. A differential of only 100 basis points is considered gigantic. So what do we call one that is 475 basis points? To the moon, Alice? All traders in this field knew this was an amazing thing. When the US and Europe dropped their own rates to 200 bp above the Japanese level, the spread was still so huge, it could fuel the 'carry trade.' The second key element in this 'trade' was a weak yen. If the yen gets strong, the lower interest rate ceases to work as a means of carrying out of Japan, huge schemes for creating debt.

Here is why people cannot understand this carry trade. It is NOT carrying away savings. It is NOT mere gambling on interest rate differentials. It is a tool that can be used for lending entities to created INFINITE loans so long as the Bank of Japan rates are low and steady while the yen is weaker than its trading partners. And people seeking to make loans do so for the profit of this business lies in collecting FEES while making loans. All those gigantic bonuses going to Goldman Sachs are of this nature. Normally, Central Banks prevent wild loan generation by enforcing many restrictions. One is to hold a reserve so these loans will be covered if there are rising bankruptcies.

But reserves are meaningless if a hostile Central Bank allows nearly infinite loan making outside of the national system of another country. Indeed, it is much nastier: normally, central banks don't do what the Bank of Japan has done because they used to FEAR a weak currency. But Japan has stood this on its head and now everyone realizes, the only way to make profits in international trade [with mainly the USA] is to deliberately weaken their own currency. Japan also hit on another element in this game which changed things radically. Namely, they also began to hold dollars in their FOREX reserves so US trade dollars were NOT coming 'home' to the US, only LOANS were coming home. The trade dollars were held by the Japanese central bank.

So why don't other nations simply drop interest rates and start their own 'carry trade', people wonder [well, anyone who understands what the real carry trade is]. It is quite simple. China has been doing this, too, only they stopped back in.....hmmmmmm.....end of 2006. This is very funny. After they stopped this, Japan and the other G7 dwarves began screaming like crazy for them to stop this which at first puzzled and infuriated China. Then they figured out, the US and Europe secretly want the Japanese carry trade to continue while destroying China's carry trade. So this is how the present currency war began. And I am betting China will win in for a wide variety of reasons. One of them being, the dying dollar cannot see a dying yen doing even worse at the same time and still have global trade of any sort. This is suicidal and the news from Japan shows that the carry trade model is breaking down in Japan, even.

The fiction of Japanese savings being the cause of money flowing here are refuted by the graph published in the NYT article. It shows that savings from Japan flowing here were NEGATIVE since...the end of the US housing bubble in late 2005. Astonishing, right? On the heels of Japanese investors pulling money OUT of the US while running a huge trade SURPLUS while the carry trade not only did not stop, it accelerated, proves my contention, savings has nothing to do with the carry trade at all. It is pure money making off of central banking differentials and the relative value of various currencies running trade imbalances! Whew!

Time for a victory lap for my brain that is about to split in two, trying to figure this all out. I ran off to the Market Oracle, a great site, to find some more proof of my contention that the carry trade is DEBT CREATION and not a transfer of savings. And as usual, the Oracle has great graphs showing what is really going on here.

M3 Money Supply for Selected Countries

When considering M3, the total money supply exceeds US$50.1 trillion! Of this amount, the U.S., Euro-Zone and Japan account for US$33.1 trillion or 66.2% of the total. The following graph shows a cross-country comparison for M3.

The Federal Reserve, working with Goldman Sachs executives who infest our entire governing system, has worked hard to hide this 'carry trade'. They absolutely refuse to condemn Japan for this because they can pretend global money generating events that cause inflation are not under anyone's direct control. They also decided maliciously to continue generating the data for M3 growth which is where we can see if money is being created out of thin air, and now this tool is missing as far as we peasants are concerned while the GS nobles can continue to generate wealth via loans. The Market Oracle has restored this data and made some really revealing charts.

We can see from both the M0 and M3 charts, 90% of the world's 'wealth' in the form of money data is concentrated in three places: the European Union, the USA and Japan. Japan's population is far below that of Europe and America so I would also say, per capita, the Japanese sector is far, far higher than either the EU or USA contributions. Note also that China, with a huge population base equal to the EU and USA together, has a far smaller money generation profile.

If we want to understand global inflation, here it is! Three localities are producing prodigious money GROWTH. This growth is massive, gigantic and awfully inflationary. Bidding on all possible things from art work to land value has gone through the roof. Now, this flood of money is hitting commodities with a vengeance. I decided to see just how vast this growth in money is compared to the nation with one of the world's biggest trade surpluses, one that has generated huge levels of savings in this last 7 years, China. I drew a line that was at the height of the Chinese M0 money making and then took the tops of the three other central banks, the Bank of Europe, the Federal Reserve and the Bank of Japan and put these next to the Chinese bar. This gives us an idea how big the differential is between China and them.

First thing, the differential of European M0 and M3 funds are greater than the entire total for China. In other words, Europe is generating NEW money at a rate that is more than double of China's rate of money creation. The US is #2 in M0 funds and it, too, is creating this faster than double of China's rate. Japan is slightly below double China's rate.

The right side of my graph show how the US M3 mess is far above not only double of China's rate, it is greater than Europe and Japan's rates. All of them are double China's rate. Note also that Japan and the US both have a much higher M3 rate than M0 rate. This means, real inflation is growing. And Japan is supposed to be in this depression. How can one have massive money growth with a depression? Not to mention great honking big trade surpluses?

Japan also claims they have not only no inflation but prices are dropping. This is pure fiction, of course, just like the US and Europe also lie about inflation. In China, the government is in a fury over inflation in food and fuel and is taking measures like raising interest rates, to deal with this. Meanwhile, Europe, the US and Japan all conspire together to NOT take food and fuel into account at all even while all three are seeing their M3 numbers rise rapidly, the US and Japan, the fastest.

The Daily FX tries to examine this:

The value for the top three currencies in circulation - the USD, Euro and Yen, comprise 66.9% of the total value of all currencies discussed here.

How can these three be so big? Three trade zones have 2/3rds of global currency growth and value? This means the world is being flooded with euros, dollars and yen, right?

With euros being 'printed' the fastest but US dollars showing the most inflation? And Japan with its .5% inflation rate running right behind both? HAHAHA. Impossible, right? Correct.

When impossible things happen, we must look to see which wizards are pulling off these tricks and my contention is, the Japanese warlock is at the bottom of this for if we turn these numbers into per capita, Japan suddenly shoots up the scale. Per Japanese, the rate of growth is DOUBLE that of Europe and the USA.

Yet they alone have no inflation and also have a dead domestic market that is shrinking. HOW CAN THIS BE???? Normally, when a nation has huge per capita M3 growth, we see huge inflation. But we aren't, in this case. So I stand by my contention that the 'carry trade' is NOT Japanese investors fleeing the Japanese markets, that would cause M3 to drop, not shoot up faster than any nation. We are seeing the Bank of Japan creating LOANS and these are certainly NOT for the Japanese consumers who are being forced to save and invest in Asia and in particular, until this year, in China. This is pure loan making by the Bank of Japan for Europe and America and thus, is the secretive and totally insane and dangerous 'carry trade' that has created LIQUIDITY in the other two trade currencies in the above charts!

Someone should tell the G7 about this but of course, this is a CONSPIRACY between the guys who set up and run this system. The Chinese have clearly shown how this system is a conspiracy and not accidental. They openly told the International Monetary Fund and the various trade and banking regulatory systems this year to stop Japan's carry trade and all have refused. Only this is finally breaking down due to China pushing up the yen relentlessly.

From Angel Fire is another FX chart that shows the relation the Canadian loonie [dollar] has with the price of oil in US dollars:

This chart is only until end of 2006. This year, things have suddenly gotten out of control. In 2004, the CD got only 75¢ to the dollar, it reached parity this Fall. Then suddenly, last week, it shot up to $1.10 and now is back down to $1.3 or there abouts. Something really big happened there. To this day, I have seen no credible speculation about that little earthquake. Something is very wrong here and the obvious candidate is not Canada's system but the US dollar. All sorts of things are rapidly becoming destabilized and in the apst, then this happened and oil and gold shot up and US banks began to fail and the stock market tanked, the US held these huge meetings we call 'Bretton Woods' or in the most recent example, the Plaza, NY, meeting. These are designed to suddenly and via a conspiratorial agreement, grossly alter relative FX exchange rates.

Back in the old days, only a handful of businesses and wheeler dealers were in the FX markets. Today, a huge number of people play this game so rigging it so openly is now nearly impossible. This is because, if the participants in the know who do this all the time in the past [the 'real rulers', aka, the 'New World Order'] could make huge fortunes playing this game with each other while outsiders would inevitably be surprised by the sudden back room deals.

This was before the internet became international. Now, anyone wishing to know anything about FX trading has instant access to all the lastest news and data. This is why I don't have to rely on my darker senses to figure out what will happen next. I can go off and simply see the numbers and then put 2x2 together. Oh, by the way, the 'darker senses' used to be me hearing gossip in the Halls of Power via my former connection to the ruling elites via being born inside that class. All this free trade business has also changed things.

All exporting companies have to have staff that tracks relative values of currencies and then make adjustments, for example. And then this leads to open interventions which Japanese exporters are openly admitting to in the news at the top of this page. I hope this clears up everything and we understand the terrible fix we are in. The US cannot negotiate its way out of our trade deficit the way we did in the Bretton Woods II meeting or the Plaza Accords meeting. And the US had difficulties with Germany [the biggest exporter to the US in the EU today] and Japan in the past and these were solved by an 'orderly' rise in value of both nation's currencies. This time, we can't do this so we are seeing a currency war raging and the US, armed to the teeth with WMD, has no weapons in this war at all. Except economic suicide.

Asian Leaders Drop India, Australia From Regional `Community'

Asean secretary general Ong Keng Yong earlier this year insisted that India, Australia and New Zealand would be included in plans to establish a free-trade zone covering all 16 nations who participate in the East Asia Summit. Today's statement recognizes China's demand that only Asean Plus Three countries should be included in the community.

``The Chinese refuse to accept the other three guys,'' Ong said in an interview today. ``They have always maintained that the East Asia community is 13 countries.
*snip*
''Asean economic ministers agreed last year to study a Japanese proposal for a 16-nation free-trade area, which would harness 3 billion people and economic output of $9 trillion. Japan's plan rivaled a separate review chaired by a Chinese academic for an economic bloc consisting of only Asean, China, Japan and South Korea.

I wondered about this story since it is in total conflict with everything I read about this diplomacy in Chinese news media. I figured, this story was put out in order to deceive people. I looked at the Chinese media and saw only cheerful articles talking about getting ASEAN rolling and including India. I contend, India is on China's Tibetan flank and there is no way they would want India outside, hostile. Indeed, in today's Xinhua news, they have a favorable article about China and India cooperating in war games and military organizational matters.

This is why reading the news all over the place is important. There is tons of propaganda out there. Also, readers have sent me news about China refusing the Kitty Hawk entry to Hong Kong. It seems, they did this to transmit to the US their displeasure over the recent war games and the Dali Lama award. A few hours of enforced apologies by the US, the Chinese let the fleet dock and the sailors meet their families. China occasionally squeezes our balls to test us and show their power. They watch us closely and match our bluster and loud declarations of desires to bring peace and freedom and whenever possible, teach us the need to be more careful with this.

I will remind people that the Dali Lamas of Tibet were horrible oppressors of the people there and ran a very ugly theocracy that promoted slavery, sexual exploitation and suppression of freedoms and killed anyone who tried to change anything there. Not a beacon of peace and freedom.

SEC's Cox says agency probing 12 CDO matters

The head of the U.S. Securities and Exchange Commission told lawmakers on Tuesday that the agency has opened 12 enforcement investigations into matters surrounding collateralized debt obligations.

"There is now a commonality of interest between banking regulators and securities regulators when it comes to safety and soundness" issues, SEC Chairman Christopher Cox said in response to a question from a member of the House Financial Services Committee during a hearing.

A collateralized debt obligation or CDO is a security backed by a pool of loans or other fixed income securities.

About time. The only time our regulators regulate is when a collapse begins, not before. This stupid way of doing things is partially responsible for all our recessions and panics. People trust all is well and then, when it is obvious to even TV talking heads, something smells, then the government rushes in to see how many criminals got away with financial murder. This backwards system has to stop. The value of having an SEC or other government agencies overseeing businesses is due to them enforcing laws all the time, not letting go of the reins and letting the business horses run riot. Always, the guys doing this end up tempted into doing fraud or lying or cheating people.

Japan's Topix Stock Index's Drop Signals Bear Market (Update1)

Japan became the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse after the Topix index declined 20 percent from its 2007 peak to yesterday.

The 39-year-old Topix, the broadest gauge of equity prices in the world's second-largest economy, fell 2.1 percent yesterday to 1,438.72, the lowest since October 2005 and down 20.8 percent from its 2007 high of 1,816.97 on Feb. 26.

We are in a global bear market that was easy to see as it padded forwards since 2006. The burst in higher stock prices were due entirely to the 'carry trade' business creating a massive amount of loans possible for investors to tap into and use to pile onto companies. This lead to everyone bidding up share values in order to exploit impending take overs that were funded by the carry trade itself. Whenever this bidding/take over frenzy tried to enter the Japanese system, the banks and the courts there would clamp down hard and stop it in its tracks. This left US and European carry trade game players seething since Japan is a prime take over target due to huge profit surpluses in many of their exporting companies.

I repeatedly noted that Japan, alone, was being bypassed by soaring stock markets. Indeed, all of Japan seemed to be asleep like Cinderella even as their M0 and their M3 values shot up higher and higher and per capita, are the highest on earth, totally and utterly. Now we see the first effects of all this on Japan rather than the US. Why is this? The subprime mess didn't happen in Japan! It happened here. Also, Japan's exposure to all this was much less than Europe yet Europe's markets kept going up while Japan was dropping.

I contend, this is due to the continuing 'carry trade'. Japan wasn't being bid upwards in the teeth of an obvious downturn in basic economic data. The US and Europe had rising stocks after everyone knew the housing market was dying here in the US. The rise in stocks in Europe and the US continued until our banking system began to collapse!

NEVER in history has the banking system collapsed before stocks! It is always the reverse. Buyers of stocks and businesses are given too much in loans by banks then they begin to collapse due to lack of buyers of goods and services. So the normal pattern is, buyers buy less, businesses lay off, so buyers buy even less, stocks go up due to dreams that cutting staff will increase profits, banks extend loans to buy rising stocks even as sales begin to go down and then suddenly, all falls apart as people belatedly figure out, you need consumers.

Then the brokers and traders get margin calls, they go bankrupt, businesses then go bankrupt and THEN the banks fall apart. Not the other way around. So I can safely say, we are in a new system which is the 'carry trade' in Japan's fault and they have to be stopped.

The loonie's push to parity with the U.S. is blamed for a drop in factory sales.

OTTAWA -- Canada's manufacturing sector put out a distress call yesterday as factory sales plummeted in September in reaction to the dollar's push toward parity with the U.S. currency during the month.

With the loonie appreciating 3.1 per cent in September versus the U.S. greenback -- a big increase for such a short period -- factory sales fell 0.9 per cent in the month to $50.4 billion from $50.8 billion, despite a modest increase in real output.

The slump cut factory sales to the lowest level since last October and ensured sales for the third quarter were 1.8 per cent lower than the second quarter of 2007. Manufacturing, excluding vehicles and auto parts, was down 2.7 per cent in September.

Because the loonie strengthened, trade with the US was so very disrupted by this, it is sending Canada's industries into a steep decline. I keep pointing out that any status quo is useful. One can project into the future. Now, we se rising chaos and the wild vacillations of relative value of currencies is a rising storm that is worsening as the dollar dies against the yen. This is more important than the dangerous fall against the euro for unlike the euro, this is messing up the 'carry trade' status quo. And this means no more funny money from the Bank of Japan. Today, frantic Bank of Canada officials led by a Goldman Sachs executive who was hired to protect the loonie [do note that the wild rise in value happened the minute he walked in the door, of course] are struggling to drive down the value of the Canadian dollar. I wonder what tools they are suing? Dropping interest rates?

Or perhaps, like Japan and China, are they holding US dollars flowing in from huge trade surpluses they have with the US? I have a number of Canadian readers. If they have access to this information, please do send me this! Thanks in advance.

Dollar falls to record low versus Euro on Fed forecast

The dollar fell to a new low against the Euro on Tuesday after the Federal Reserve said a housing slump, tighter credit conditions and high oil prices would likely slow the U.S. economic growth in 2008.

The dollar also fell on speculation a group of six Arab nations will end their fixed exchange rates to the U.S. currency. Gulf states face rising price pressure caused in part by the weakening dollar that has made imports from Europe more expensive.

The Xinhua chart clearly shows that the US is dropping relentlessly against the euro since 2006. Actually, it has been more or less since 2002 when the carry trade began in earnest. The carry trade could have happened earlier but it takes time for the wizards of finance to figure out various glitches and new toys and the ones who found this secret, dark cave where money magically appeared and even the Federal Reserve had no control over, they didn't tell their rivals, of course. Most of the intrepid explorers who found this carry trade cave were, of course, pirates and hell hounds of the hedge fund world. They have gone totally insane over this and have taken over the world's entire business finances thanks to this discovery. This is the main reason why THEY have grown so swiftly. And why this has been echoed by the huge growth in EU/US/Japan money systems.

"The trend of a weakening dollar will continue," said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world's largest currency trading bank.

The dollar will decline to 1.50 dollars per euro by the end of the year, according to Boyton.

A so speaks the Hell Hounds. Note that Deutsche Bank, an entity in very serious trouble today, a bank that is worried about collapsing, is also...the world's largest currency trading bank! The conflicting roles within Deutsche Bank is a scandal, of course. This bank hands out masssive loans or handles many pirate take over deals that are funded via the 'carry trade' with the Bank of Japan! And as they create money, they create inflation and as they guaranteed loans to reckless housing purchasers in the US, they created more M3 money which is now causing the world banking system to collapse. This is why, instead of fixing the real mess in Japan, they want it to continue and are willing to help Japan do this.

What I am guessing, via my inner eye seeing things in the dark, is this: Deutsche Bank, the world's biggest FX trader is selling both yen and dollars. This is making both dive down at the same time. But this same bank is also using the Japanese carry trade to do this! HAHAHA! I see a problem with all this. Ancient stories come to mind. Such as Thor's drinking party whereby he tried to drink down the world's oceans while thinking he was draining a horn of mead. Or picking up the kitty cat but unable to since it was the giant dragon that encircles the earth. So it is here: Deutsche Bank wants to pick up the US and European banking systems but it can't do this because it also must pick up the gigantic FOREX reserves in Asia, the Dragon and the Drinking Horn.

The only nations that can play this game are those with Sovereign Wealth Funds and huge FOREX reserves. Say 'Nice kittty' while petting this dragon! And we know that China has real wealth because their M0 and M3 numbers are far better than Japan's. This is also why they and not the US or Europe, can kill the carry trade and raise the value of the yen. Without breaking into a sweat.

Cerberus drops $4bn Chrysler bond as credit crunch bites

The credit market crisis is causing three headaches for Cerberus Capital, the private equity firm named after the mythical, many-headed hound of Hades.

The firm was yesterday working on a turnaround plan for its GMAC Finance business, which it part-owns with General Motors and whose residential mortgage business is perilously close to breaching debt covenants that could result in its tipping over into bankruptcy.

At the same time, financiers for Chrysler, the carmaker purchased by Cerberus earlier this year, were forced to abandon a $4bn (£1.94bn) bond sale, raising fears that investors are turning their backs on the market for loans from highly leveraged private equity-owned companies. The news came a day after Cerberus was sued in a US court over its attempt to wriggle out of another leveraged buy-out deal it signed in the summer.

More proof the carry trade is ending. GMAC is going bankrupt and this is due to the M0 and M3 money shooting up in the US to an unsustainable level. There is no more room to keep doing this coupled with a dying dollar and a rising yen! And the top hell hound, Cerberus, is barking in court, hoping to hightail to the hills. They got their paws stuck in the door when the carry trade suddenly ended this summer back when everyone was boasting about stocks rising ever higher and there being so much liquidity due to Asians 'saving' money and sending it here and then on 7/17/7, it all came to an end! And Cerberus has no freebies, no 'new money' to use to buy anything. Maybe they can post bail with whatever is left, hahaha.

This is a long article because I am coming to a very hard point to make here: derivatives. They are a super-monster that was born of the union of Japanese carry trade nonsense and the banks and investors seeking to hedge themselves from risk only to create this hybrid creature that grew to far greater size than not only all the M0 and M3 funds in the world but also the combined incomes of all nations, far bigger than the possible value of all the world's GDP and GNP! Look at the insane numbers here!

Derivatives Grow at Fastest Pace in Nine Years to $516 Trillion

The market for derivatives grew at the fastest pace in at least nine years to $516 trillion during the first half of 2007, the Bank for International Settlements said.

Credit-default swaps, contracts designed to protect investors against default, led the increase, expanding 49 percent to cover a notional $43 trillion of debt in the six months ended June 30, the Basel, Switzerland-based bank said in a report published late yesterday. Derivatives of debt, currencies, commodities, stocks and interest rates rose 25 percent from the previous six months, the biggest jump since the BIS began compiling the data.

$516 trillion? What? Pass that by me again! How on earth can this be???? How dare the Bank of International Settlements just sit on this information? How dare the central banks of the Federal Reserve, Bank of Europe and Japan just sit there? How can the governments of all these nations just sit on their asses while this monster grew? This is pure lunacy! The US Federal debt is the biggest on earth. It is a mere $9 trillion and I think that is hideously high. England has one that is $8 trillion and Japan, $7 trillion. These three top debt holders together equals $24 trillion. The EU has a little less than this collectively. About another $15 trillion which is a total of $39 trillion for the biggest trade nations in the G7. And these guys are also the ones with fast-growing M0 and M3 money!

So, these crazy derivatives are over 13X bigger than the top nations of this world's debts? How on earth can this be? Derivatives are growing like a huge...bubble! Faster and faster. Contracts that are supposed to hedge these hell hounds and pirates have grown by nearly 50% in the last half a year? Wow. And they need protection for nearly $50 trillion in DEBT DEALS???? Wow. Say hello to the carry trade baby monster! Try picking it up and petting it! NO BANK HAS THE ABILITY TO GENERATE $50 TRILLION IN LOANS! And forget about any bank being able to bankroll $500 trillon in loans.

Except for mega-machines run by one of the holders of the world's largest FOREX reserves.

The entire hedging business which as grown out of two previous currency collapses, the Bretton Woods II collapse and the Plaza Accords collapse, have now utterly and totally and horrifically taken over the world's entire system for determining not only value but the very meaning of the word, 'money.' This DEBT which is over $500 trillion will destroy the value of all existing money if it is called upon to pay off losers in a global stock market, commodity market and asset market melt-down. And this, dear readers, is a repeat of the Great Depression with an ugly little twist: money during that became hard to get and more valuable. But thanks to Europe, the USA and Japan expanding their money making, this will cause a bizarre storm of great inflation on one half of the planet and great depression on the other half. Yin and yang leading to a collapse of world free trade systems.

Credit-default swaps are ``the dominant instrument,'' accounting for 88 percent of credit derivatives, the BIS said.

The money at risk through credit-default swaps increased 145 percent from last year to $721 billion, the report said. The amount at stake in the entire derivatives market is $11.1 trillion, according to the BIS, which was formed in 1930 to monitor financial markets and regulate banks.

The US and EU governments should be holding emergency meetings today about this. Right now, all they have done is try to feed this gigantic baby global dragon. Drinking the oceans down will be easier than picking up this giant that snakes across the entire planet. I would suggest the Bank of Japan, which has seen DECLINING inflation at home while its M0 and M3 have grown like crazy, has no desire for this $11 trillion to come home. They don't care if it VANISHES. If $11 trillion in unwanted yen vanishes, this makes the yen weaker and Japan will feel safe, I guess. I really am guessing here, by the way. There is so little information connecting things with each other. I feel like Gretel in the fairy story, wandering in the Black Forest, looking for a gingerbread house and a witch.

Characteristics of Credit Default Swaps

The credit default swap market is generally divided into three sectors: corporates, bank credits and emerging market sovereigns. CDS can reference a single credit or multiple credits. Multi-credit CDS can reference a custom portfolio of credits agreed upon by the buyer and seller, or a CDS index. The credits referenced in a CDS are known as "reference entities." CDS range in maturity from one to 10 years although the five-year CDS is the most frequently traded.

Unlike total return swaps that provide protection against the loss of credit value irrespective of the cause, credit default swaps provide protection only against previously agreed upon credit events. Below are the most common credit events that trigger a payment from the risk "buyer" to the risk "seller" in a CDS.

Pimco has a pretty good series of charts explaining all this. Hedging for specific events can be a passable way of gaining money during good times when hedgers pay an 'insurer' money to hold and then, perhaps, pass back in bad times. But when we get a 'perfect storm' which happens like clockwork, unfortunately, then the demands for insurance swamp the insurer who declares bankruptcy and the hedge is flattened by a charging line of knights on horseback. Then the whole thing goes kaput.

Source: Credit Derivatives and Synthetic Structures, John Wiley & Sons. 2001.

The CDS market was originally formed to provide banks with the means to transfer credit exposure and free up regulatory capital. As the credit default swaps market became more standardized and gained credibility, particularly following smooth credit event settlements in high profile cases such as WorldCom and Enron, more investors entered the market. While banks-through broker-dealers and reinsurance companies-are still both the largest buyers and sellers of credit default swaps, investment management firms are following closely.

Today, CDS have become the engine that drives the credit derivatives market. According to the British Bankers’ Association, the credit default swaps market currently represents over one-half of the global credit derivative market. The growth of the CDS market is due largely to CDS’ flexibility as an active portfolio management tool with the ability to customize exposure to corporate credit.

So these stupid and futile hedges are one half of all derivatives? We will get to see this total sum if the entire economic system breaks down. Again, the queerest thing about this present collapse is how it is hammering bankers FIRST, not last. Perhaps this is due to all the hedging 'working' in a queer way. As the hedges function and stop money from flowing in one direction, it is causing a serious and very dangerous deformation in an unexpected sector. Just like, if a dam holds in a flood, the flood then flows elsewhere or fills the wrong places or is held back but then this makes the flood worse when the dam finally bursts if the rain falls even longer.

The main thing is, these sums are ridiculous now. They are encompassing nearly all financing and far from making things stronger, they are actually a potential trigger for a vast flood of red ink suddenly being unleashed across all systems and all countries at the same time whenever things fall apart too much in say, the US housing markets.

Weak U.S. dollar urges Waterford Wedgwood to slash Irish work force in half

Waterford Wedgwood PLC, luxury tableware manufacturer, is cutting 1,400 jobs worldwide, even nearly half of workers at its flagship crystal plant in Ireland, in part because of the weak U.S. dollar.

The Dublin-based company, which has reported five years of deepening losses and debt, said it would lay off 490 of its approximately 1,000 workers at the crystal factory in Waterford, southeast Ireland - and focus on developing the plant's status as a tourism magnet.

This is yet another story about how currency valuations relative to each other are now destroying world trade. Free trade was a false idol worshipped by the School of Chicago, one of the dumbest economic diploma mills on earth. They are still very vain about themselves, alas. Many of our top economic advisors come from that joint. They are now all over the planet. Like plague rats.

Chinese share prices slump heavily

Chinese share prices on Thursday slumped heavily as the benchmark Shanghai Composite Index, which covers both A and B shares, plunged 230 points, or 4.41 percent, to 4,984.16 points at the close.

Heavy-weights such as PetroChina, China Pingan and Citic Securities led the downward trend.

The dirty commies of China are desperate to stop their bubble. They are taking draconian measures. Being a dragon, this isn't to hard for them. The US and Europe would be crowing like crazy if they had a 11% growth rate and markets shooting up 100% in less than a year. But the Chinese know their history so they are troubled. The US and Europe have created many trillions by sneaking off to Japan's carry trade window and they know perfectly well, the boom of the last several years is very fragile now and the debts accumulated in this fashion cannot easily be repaid. The Chinese are pulling back quite deliberately and are willing to take the heat for this contraction. The US and Europe cannot do this.

Which is why the making of M3 funds has risen, not dropped! The US and Europe have been pouring money into their banking systems and this is increasing global inflation only the US dollar is dropping and the euro os rising and this strange see-saw cause and effect is a wonder to behold and figuring it out is a challenge. But of course, all of Asia is selling dollars right now and buying euros only because the euro is going up so they are forcing it up and up and up while at the same time, both China and Japan are trying to drive up EACH OTHER'S currencies! And overhanging all this is a huge mountain of funny money hedges which are so big, it is nearly impossible to see the peak of this mountain that is wreathed in clouds.

The Abysmal Track Records of Moody's, Fitch and S&P

Gasparino calls the rating agencies track record "ABYSMAL." He explains what he describes as their "hopelessly conflicted business model." He challenges readers to consider the track record of "what they get paid to do — weighing the risks for investors and traders who buy bonds."

Most of all, he notes simply: The rating agencies significantly contributed to the subprime crisis that caused the credit crunch this past summer and that may sink the economy into recession.

And this was an important part of the 'making funny money' system: lying about the quality of the loans, lying about the quality of the pirates and hell hounds peddling or holding these things. We see more and more parts of this system collapsing. And a real deep root cause is pure wishful thinking that if one can make up money out of nothing but promises, one can run up infinite amounts of money based on infinite promises of repayment in some distant future.

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Comments

[Frank]

Elaine,

I still don't get how the Carry Trade benefits the Japanese wizards? What is the basic point of extending all these cheap loans? Does it contribute to suppressing the value of the Yen?

[DeVaul]

Wow, Elaine!

Thanks for explaining the entire modern world economic system to us. You should really compile all this into a book and sell it. I am sure someone will buy it if you can find a publisher. Might make life easier for you and your family and teach future econ grads the real story of the Second Great Depression.

Can you imagine what Bernanke's version would be like?

[Elaine Supkis]

Duval, thanks for the letter you sent. Just looked at it and laughed.

Frank, the Japanese rigged up this system of creating what they hoped would b a perpetual 'cheap or weak yen'. This is supposed to prevent the US from valuing the yen upwards via another Bretton Woods or Plaza Accord deal. This way, they and say, 'So sorry, we can't change, this is due to our depression.' They LOVE a weak yen because they get more and more of our auto market this way and Toyota is dominating the entire world and is #2 in the USA. A major goal is for all Japanese corporations to dominate the US market, something the Chinese and Koreans are fighting.

The 'carry trade' was when some wheeler dealers figured out how to exploit the 0% Japanese interest and expand it 100X over. At first it was just one or two guys then twenty then a flood. Now, all top traders were doing this until the Chinese began their 'make the yen strong' program which is ongoing.

[Elaine Supkis]

Devaul, sorry about the clumsy spelling of your name. I just finished screwing in a whole bunch of boards and my fingers were stiff.

[mike s]

Elaine...you have been right about so much.

Just think who would have been left holding the bag if President Bush had gotten his way and put social security money into the hand of wall street , HAHAHAHAHA...the average little guy and gal would have been left hold the cdo / siv bag (an empty bag) and the big shots would have gotten away with an even another highway robbery.

Here's a link to the collapsing northern rock bank and how off-shore private equity funds hold the securities of dubious value underlying norther rock's assets.

Looks like the royal bank of england is on the hook ie taxpayers.

thanks for all your effort

http://www.guardian.co.uk/business/2007/nov/23/northernrock.bankofenglandgovernor

[John]

DeVaul,

I've said the same thing to her, several times, in email. Elaine absolutely needs to write a book, or a small set of them. However, the real trick will be finding a publisher, given who runs the media and with what purpose it is run.

As far as Bernanke's version of events, I'm beginning to have my doubts. Greenspaniel would have already had rates below 3% by now. It really did look like Bernanke was going to make the Wall Street crybabies pay the piper back in August, when the Fed left rates unchanged at their regular meeting. I strongly suspect that not long after that, Paulson delivered the BushCo messaage of "cut rates NOW - or else."

[DeVaul]

Elaine,

You are welcome. Are you boarding up your house?

There is another letter coming which contains an insert that I would have thrown away anyway. Seems the top moneymen already know what will happen and are positioning themselves to take advantage of the mess THEY created. Great!

What truly pathetic lives these men lead.

[DeVaul]

John,

Perhaps you are right about Bernanke. Elaine's cartoon of him at that Idaho picnic comes to mind....

However, I am still very suspicious of Bernanke. I really find it hard to believe he did not know his former boss was lying or that he also would be called before Congress to explain our "economy" once he reached the pinnacle of power at the Fed.

How could he advance so far and not know what was really going on? Is the ruling elite's big secret really so carefully guarded that only the head of the Fed would know about it? I just don't buy it.

Willful ignorance is the same as "knowing" in my book.

[jean]

Elaine, you are too funny somestimes...

"Time for a victory lap for my brain that is about to split in two, trying to figure this all out."

I laughed for a minute after reading that line

[Elaine Supkis]

Thanks for the Northern Rock link, Mike. Jean, I have to laugh when I write or it gets too boring or stupid. Somewhat.

Devaul, the guys writing that news letter are nuts. Talk about Pollyanna bananas! And my take of everyone at the top: they know perfectly well, what is going on. They PRETEND to be clueless. Note how they all have hedges and helicopters and Paraguay ready for exits.

[John]

Agreed about the people at the top, Elaine. But I'm wondering if perhaps Bernanke doesn't know what you do - that this whole mess is going to be horrific at best, and that if any fix other than raising rates to be higher that real inflation is attempted, the whole system is going to outright collapse? I've seen some video of Bernanke being grilled by Ron Paul and others in Congress. I just get the sense that he's being evasive, but that's not real happy about having to do that; his heart doesn't really seem in it. (Paulson, in comparison, strikes me as a soulless prick from the lowest level of Hell.) I'm certainly not expecting Ben to blow the whistle, but I do wonder if perhaps he wouldn't prefer to let the messmakers be the ones to pay the price, rather than crash Western Civilization for the benefit of BushCo & Pals.

[Blunt Force Trauma]

No one by the likes of CNBC, Bloomberg or the 'Great Roubini' are as thorough as Elaine!

This was definately a 'drink and a sandwich' read, but wow, this needs to be taught at the junior high school level. Hopefully, we'll be able to avoid a third Great Depression. Unlikely though, as we are making whole new mistakes ushering in a second one right now. We didn't learn much from our history. Just skewed it a little. The result is to be the same.

See you in the soup lines.

[Blunt Force Trauma]

John said...

"Paulson, in comparison, strikes me as a soulless prick from the lowest level of Hell."

LOL. Isn't he a former Gollum Sachs pinch-hitter? That explains it all right there.

[Neuro Artist]

I don't think this is going to be a 'second great depression'. It is panning out to be the ultimate disaster. There isn't going to be a 'third great depression' after this one. Goldman Sachs were bragging a week a go or so how they had shorted the multibillion dollars loans, they had issued to poor risks. Of course their stock price rose. However the problem is that those who took the risk of these bad loans are not in a position to pay Goldman Sachs anything, since they are going bankrupt. All these promises of safety that the derivative market promised, are just empty, nothing, nada, the stack of cards have just begun falling, and it is going to be the collapse of all financial activity that involves money, which mean there is not going to be governments, electric companies, internet providers, gas stations, water works, law enforcement, sewage treatment, hospitals (since they can't pay for people working there with something they find valueable). In the close future, you'd better stock up on physical things that are worth something in the context above, if you want to survive, the avalanche is coming. The system was built on trust, that if you insured against a risk on the derivatives market you would get paid when the going got tough, when that trust is gone it is just going to fall to pieces and all monetary activity will come to an abrupt standstill. Money is also based on trust....

[Al]

Elaine, thanks for taking the time to write this. I'll have to read it a few times, some things don't sink in the first time. or the second. Looks like you had a nice holiday meal. Glad to hear this, and take care.

[big]

Neuro Artist writes a serious possibility that all must consider.

Not only is money based on trust, but societies are based on trust. Trust that the system isn't rigged. Noone plays at a casino when they find out that the house cheats.

Much of the media manipulation is to convince people that our economy is fair. That society is a true meritocracy, and that if you end up at the short end it is either your fault either through will or genetics.

My wife is reading the book "The Mommy Myth" by Susan Douglas. It is an interesting read, which illustrates a timeline of the corporate media's takeover of the American family.

[OC]

Big,

We should consider barter trade, cold hard cash as in metal coins or skills once the system crashes...do be careful not to be branded a hoarder as governments have a tendency to confiscate during emergencies..

[Elaine Supkis]

I still find the $500 TRILLION hard to grasp. I wonder why this isn't headline news across the board. But people buying Little Elmos made in China with toxic eyeballs is more important.

[OC]

Elaine,

Can't u hear the dragon laughing so loud in his cave??? He is going to crash this system ...and pick up pennies for the billions of USD worldwide. Miz Japan is fence sitting and once she decides to join China and Russia...the game is up!!! Beowulf better wake up fast...deal of the century is closing fast!!!

[Elaine Supkis]

Nothing will be worth pennies. It will be worth a million dollars...for one gallon of gasoline.

[OC]

Not if China barters by using either gold or manufactured goods...note that most of the manufacturing is now based in Asia...in the end ME wants a good life and will accept payment in kind. A fall back to 15th Century economic model between China & ME??

[Elaine Supkis]

You know, trade with the Middle East and China is very, very, very ancient. China made silk and porcelain goods and got gold in return. Now, they will get black gold. We are busy selling weapons right now, over there.

[DeVaul]

Speaking of trust, it appears our Congress Critters (I like that term, Elaine, so I am using it too) already know what is coming. They are passing a law called the "Radicalization and Domestic Terrorism" act or something like that.

It will allow them to brand any American citizen a terrorist if they agitate for change or an official accounting after a major catastrophe, which they know is coming.

I do not have a problem with barter. That was how I got my front porch fixed many years ago. I traded my pottery for the carpenter's labor. It worked fine. No one got cheated and we did not have to kill any trees to sign papers and then shred them.

I think those who have never really worked hard in their lives will find the barter system not much to their liking. Those who are disabled or old must be taken care of because they cannot trade much other than their time and perhaps some small amounts of labor. The fat, lazy bankers will demand that many people die so that they can live off of the remaining people's labor.

I hope Americans will reject this system and I hope our soldiers will also, but I am not holding my breath.

[Neuro Artist]

Its like a great pyramid scheme, where all the money in the world and more is on the table right now, no-one can afford to loose so the stakes have to be raised. More money/derivatives must be created at a greater and greater rate to cover up the bad risks. Thor drinking the oceans is a good analogy. The scale of this is just too impossible to mentally grasp.

Is it even possible to unwind this in a structured way at this point? Probably not, and human psychology would probably prefer to put the pedal to the metal and drive it off the cliff, than to stop, repair the car, the road, the toxic environment, sort out the mind of the driver, and all the debts taken to buy and repair the car, the road, the environment, spent on booze and good times.

This time I don't even think we need to consider that government will confiscate our properties, government becomes irrelevant at the same time as their fake money becomes irrelevant, that doesn't mean government officials, and law enforcement people will not come and try and steal your valuables, they probably will, and other desperados too

About the Tibetans, the interesting thing is that all the pagodas and temples destroyed during the cultural revolution, were not destroyed by the chinese, but by Tibetan youths. I believe the present Dalai Lama is essentially a good man without evil intentions, who of course has his flaws like any human being. But he has indicated that he is not going to re-incarnate any longer, which may be his vote of no confidence in the system committing all kinds of atrocities against Tibetans over the centuries....Probably though, a Buddhist theocracy is better than the other religious alternatives, but that doesn't mean that it is any good.

I hitch-hiked through Tibet (from Nepal to the Xinjiang province of Northwest China) in 1995. Fascinating place, with fascinating people, very friendly, but I believe the Tibetans are in a minority in Tibet nowadays.

[aa2]

Thanks for getting all that data elaine.. I am a data monster like cookie monster.. really interesting seeing all the m3's together compared to each other.

[aa2]

It does look like Japan's subprime exposure was small. I speculated on another forum that they got their a-- handed to them in the late 80's on bad american investments and were much more cautious since. They are like me, treasuries is their main holding right now!

[t t]

great blog!

[Elaine Supkis]

Both the Japanese and Chinese gave us loans but DO NOT HOLD THEM except for government treasury bonds and this is to control our government.

Europe is the one caught holding lots and lots of US CDOs. Poor saps.

About Tibet: my parents were there when the Chinese invaded. They got out, barely. Over the mountains to Nepal. We knew the Nepalese royals really well. They were all brutally machinegunned dead by the Evil Uncle who now rules there, except the people are tossing his ugly mug out the door, thank heavens.

[Neuro Artist]

I actually walked across those mountains, after leaving Nepal, I found that there was a landslide and no buses were travelling, so in a true Forrest Gump fashion I decided to walk, and after walking for half a day, someone asked if I wanted a ride, which I unlike Forrest accepted, and then I just hitch-hiked to Lhasa, where I came down with hepatitis, which I contracted from drinking dirty water in south India, thought I had altitude sickness, since I was feeling so weak, before someone pointed out my yellow eyes. Was resting it out for a few days with high fever until I got my strength back to hitch-hiking, was actually considering taking the bus from Lhasa, but the 5x the chinese where overcharging foreigners for bus-tickets, made me decide on hitch-hiking. I was first going with a very friendly Tibetan lorry driver, until he was not going any further. After that I paid a chinese lorry driver a 100 Yuan to take me to the Xin-Jiang province. This was one of the worst rides of my life. The truck went empty and since the suspension was adjusted for a full load (very hard), and the road was like a plowed frozen field. It meant that I probably spent more time airborne than on the seat, and the truckdriver was scolding me for making noices with my feet slapping the floor, further they stopped to sleep at a mountain pass more than 16000 feet high, it was extremely cold, when the sun rose it was ice on the inside of the windshield. It was a 36 hour ride, and I was very tender in my entire body when I arrived. Nepal is an interesting country managing to stay independent between 2 superpowers (India and China). I'll bet they have a highly evolved diplomacy. I have only spent a few days in Nepal though.

[Elaine Supkis]

What a great story, Neuro Artist! And you are certainly an old-style 'explorer' who would go wherever one is flowing. I have hitchhiked many times. As a younger girl. Have many amusing stories about those journeys, none of which were boring. Knowing how to cook outdoors has been a great boon in these travels. Even drivers are curious about that and enjoy these meals.

Once, I saved my life by showing some rather vicious bikers who were going to kill me, I could skin and cook a rabbit they ran over. Then I did a deer. They then wanted to keep me. I had to slip away several cities later. With a wig and a full disguise.