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September 21, 2008 Newsletter
Credit Derivatives? Gee Wiz, Calculus Derivatives Were Easier to Understand than This! Plus: "Must See" Videos on the Economy and More
First Bear Stearns, then Ambac, then IndyMac, then Fannie and Freddie, then Lehman, now AIG. Credit derivatives...that's the problem. But what in the blue blazes are credit derivatives? In article after article, from the Daily Reckoning to Bloomberg and all the doomsayers from the Mogambo "We're All Freaking Doomed! (WAFD!)" Guru to Gary North and even Bernanke and Paulson claim now that we are in trouble economically because of sub-prime mortgages and "credit derivatives," in which, of course, when they speak or write, it is as if they assume that everyone knows what a credit derivative is. Well, for one thing, it doesn't sound as if "credit derivative" means "rate of change of credit," unless, of course, the limit of credit is approaching infinity.
For, in mathematics and particularly in that branch known as calculus, a derivative means "rate of change." In algebra class you learned to solve "uniform motion problems" (distance = rate x time) where, say, if you drive 500 miles at 50 mph, how many hours will it take to drive the 500 miles? Ten, of course, is the answer, dividing 500 by 50. The thing is, no one is going to be able to actually in reality drive for ten hours as 50 mph...not with cruise control, not with any device known to man. Fifty mph, however, might be some sort of average rate/speed. In reality, you are likely to drive 50 mph for only very short increments, seconds perhaps, when you aren't actually driving 49 mph or 51 mph or 52 mph, etc. And why drive 50 when you can be on the Interstate driving 70? But anyway... No one uses "uniform motion" for more than a relatively small batch of miles, even on the Interstate. Yet let's say you have and use cruise control. So that for about ten miles you are alone on the Interstate and you don't have to slow down for anyone or anything, and can drive 10 miles at exactly 70 mph. But right at ten miles you see a cop car and instinctively put your foot on the brake because, who knows? His radar machine might have you going at 71 and you don't want a speeding ticket (especially now, when they just might want to take a sample of your DNA or something!). So you slow down, for a mile or two, to 65 mph. Then you go back to 70, but a mile or two down the road some small animal is running across so you slow down for it. Back to 70 for a few miles, then you come upon some pothole in the road, which slows you down immediately. Get the idea? You are, in fact, going not miles per hour but miles per minute or even feet per minute or feet per second! The distance you are actually going during all these rate changes is not 500 miles or ten miles or two miles or even half a mile! So that the distances we are really talking about are "derived" from the rate/speed per unit time we are actually dealing with.
Economically speaking, however, credit "derivatives" appear to be "derived" from the fact that when Bank A lends to Corporation B, where Bank A considers the possibility that Corporation B may not be able to pay back with interest the value of the loan for whatever reason, Bank A wants "insurance" of some kind, or guarantee, to assure themselves that Bank A will get its money back with interest (in theory). So, Bank A goes to Credit Derivative Creating Company C (heretofore known as Company C), which consults the rating agencies, its own computer models (some call them "quants"), and for a stiff fee weighs the "risk" regarding Corporation B to be able to pay back the loan, and, if it finds B "should be able" to pay it back (whether or not it actually can pay it back), charges the bank accordingly and assigns "risk" to the loan--the higher the risk the higher the fee. However, what Company C is set to do is guarantee Bank A that almost no matter what happens, Bank A will be paid by Company C, what with the "insurance" Company C has sold to them by selling the derivative to them. So, C puts this "insurance" or derivative in a bundle with similarly-assigned risks. You may remember back in the 80s (when in fact derivatives were first created) when you went to buy car insurance you might have been placed in an "assigned risk pool" if you had any accidents on your record, which meant you had to pay more for insurance or were less likely to be insurable. I believe that this sort of thing is an analogy. But here's the kicker, and why "credit derivatives" have become instruments that have gotten out of control. Bank A might think Company C is insuring their ability to get paid back no matter what, but it turns out that unbeknownst to Bank A, Company C has contacted Company D, another credit derivative creator, to "insure" Bank A's credit derivative, for another hefty fee, this time from C! And who knows? Company D might be bundling C's derivatives with others of similar risk they have, and selling them to E! And E sells to F. And F sells to G. And on and on. So NO ONE KNOWS JUST HOW MUCH MONEY IS TIED UP IN CREDIT DERIVATIVES! I have seen figures as low as 65 trillion dollars (US derivative debt) to 65 quadrillion dollars in world derivative debt! Folks, THERE IS NOT ENOUGH FIAT CURRENCY OUT THERE TO ACCOUNT FOR EVEN 65 TRILLION DOLLARS LET ALONE 65 QUADRILLION!
I can do calculus derivatives. But I can't do, can't believe, and can't understand HOW STUPID "THEY" ARE for letting this fiat money situation get so out of control the way THEY have: the first credit derivatives were created by "Illuminists" J. P. Morgan (now J. P. Morgan/Chase...Chase, of course, is Rockefeller) in the 80s. I raised a stink about taxpayers having to bail out Fannie and Freddy, and now we have to bail out AIG. That was last week; who are we going to be forced to bail out this week? Next week? And so on. As I said, no one knows how much in credit derivatives there really is money-wise. But even if US taxpayers are going to have to bail out even a fraction of a percentage of it, I suspect that US taxpayers simply do not have even this fractional derivative-covering money. I've said it before and I really mean it now: you can't get blood out of a turnip, and, even with hyperinflation (Wiemar Republic-style or Zimbabwe-style), the US taxpayer WILL NOT BE ABLE, even at 100% income taxation, and even if it takes unto the third and fourth generations (yes, we are talking Biblical proportions here!), this debt WILL NEVER BE PAID OFF! Even if every US taxpayer is forced to give up all income and all assets and be in fact slaves or serfs/indentured servants/debtors-prisoners, THIS DEBT WILL NEVER BE PAID OFF! That is why I keep saying that THEY, who rigged this system beginning back in 1694 with the Rothschild's Bank of England, ARE IDIOTS! This claim is not a judgment. It is a fact, and, as smart as THEY are (despite inbreeding, THEY are plenty smart) I can't believe that Rothschild back then couldn't see this coming, and, if he did, knew he would be dead, and his children and grandchildren and great- and great-great-grandchildren and so on would be dead, so he couldn't care less that eventually his system would destroy every economy on the planet. And now for "Lagarde's Mathematical Law of Turnip Bleeding Calculus"--"As the limit of US government debt approaches infinity, the taxpayer's limit of patience with said government approaches zero."
And you have those who blame all of this on Bush and company who borrowed from China to finance all these wars, (and now, Pakistan!?!), and that now he and his administration will be forced to pay back China and the others by letting China and the others buy our assets at pennies on the rapidly deflating dollar (or is it inflating?). Assets like WAMU, Chevrolet, Big Bend National Park... who knows? My property? Who knows? Your property? Who knows?
I had said I was going to put up some videos...some on the economy I've seen over the last couple of days, and some others. Captions are below the video.
Ohio Rep. Marcy Kaptur on taxpayer bailouts First shown last August, this is the one where Cramer goes nuts. Worth another look. The economy's troubles have the potential to "end the US givernment" as we know it. (And, as per the May, 2007 National Security and Homeland Security Presidential Directive, there really is a possibility that Bush will cancel the elections! Parody "McCain for President" ad Chris Matthews exposes Republican hypocrisy and acts the way the MSM should have acted for the last 8 years...no, since Watergate
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