Wednesday, April 07, 2004

Derivatives Expose'


"How efficient (in the technical sense) are real-world markets? Corporate scandals, bubbles and assorted dubious data points (like the US Senators' consistently high investment performance) suggest that the answer is "not as much as we'd like to think". I'm a big fan of Adam Smith's heartless invisible hand, but I worry like hell when it starts looking stupid."

I just sent this related comment to another bonoboer, about structural reform.

"Beyond the economics, the difficult part of this is political." As you have written, this is by far the greatest hurdle. I also think educating enough economists to make it politically possible is also a great problem. I think the derivatives markets will start showing their ugly face shortly, and make knowledge evolution a considerable amount faster. Just as an example, if I were Wall-Mart right now, I'd have bought as many trillion dollars worth of forward contracts/derivatives contracts as I could afford out to five years at China's current prices, and renew every year there is no currency reform toward real rebalancing. I/Wall-Mart would be plenty safe as it will take a minimum of five years for real currency reform to cut into such forward contract advantages, since the financial markets can't safely handle any more than 20% per year currency reform - thus a five years minimum market gauranteed profit. This is only Wall-Mart, think of all the other ones really doing it, with all the other corporations. I believe the number is three major U.S. banks have been given the green light by China to start selling their own derivatives inside China. China is already operating in the derivatives market through its own SOB's and through its Hong Kong banks. Anne at Bonobo posted an article about corporate profits surpassing labor profits by a wide margin, only recently, for the first time in history. This is most likely attributed to increased derivatives insurance and speculative activities, ie, guranteed profits. One final thought, remember I stated none of the bancor type schemes should be undertaken without real and thorough structural reform, as to do so would only be self-defeated by the global $874 trillion derivatives realities - BIS factual numbers: BIS You can't beat the speculators when they're insured by this much actual turnover. Only true currency reform to sane balances will solve this problem. Derivatives become less necessary and less profitable the closer we arive at a future true equilibrium. In my opinion, this is our only hope.

"Are we becoming, as individuals, groups and species, better information processors, smarter?"

"Without a full understanding of the functioning of forward markets, all discussion of exchange rate policy must remain seriously deficient." Egon Sohmen

Need I/Egon say more about derivatives?

The Day The Fed Stood Still!

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