The Federal Reserve seems to be manufacturing an impressive supply of "greater fools" to go along with the dribs'n'drabs of credit that it is dropping into the sucking chest wound that the economy has become for the body politic. The Fed's idea, I suppose, is that if they lend a little money to the geniuses who engineered the latest (and probably last) bubble of the cheap oil age to cover their present losses, then the US economy will "right itself." What I think they don't get is that finance has virtually become the US economy — if you subtract it, there is nothing left besides hair-styling, fried chicken, and colonoscopies. By "righting the economy" do people mean the ability to keep running a transparently fraudulent set of rackets that have nothing whatever to do with financing real productive activity?
By "greater fools" I mean, of course, buyers willing to step up and purchase securities that other people are shedding as if they were smallpox blankets. But even the Fed's supply of greater fools may prove insufficient when it becomes evident how much bad paper really is out there, and how it has been allowed to contaminate every tradable niche in the banking and investment house of horrors. I don't think we've begun to hear the disclosures.
The destruction continued globally last week, with dark portents for this week, and indeed for the rest of the year. The much-mentioned "carry trade" — borrowing Japanese yen in massive bales at ridiculously low interest and stashing the money in places where returns are higher — got rocked as stock markets shuddered and currency spreads began to go this way and that way. This could not have been healthy for the derivatives geniuses, whose algorithms get the flu every time the temperature changes on a trading floor somewhere, and for whom the carry trade has been a sort of money strip-mining operation in recent years. Last week's action must have burst a lot of cell walls under those high foreheads. The Big Fund Boyz have been scrambling to paper over the damage. But sooner or later, the strength of the unwind will surpass their ability to pretend everything is okay. My guess is they will do just about everything except put their worthless MBS-and-other-crap-paper on the auction block — and then we'll get two things: straight-up announcements of capitulation and insolvency, and addenda to the effect that, oh, by the way, our fund was incorporated in the Cayman Islands, out of reach of the US courts, for those of you credulous slobs out there who were thinking of suing our asses, so fuck you (and won't that work nicely for the US financial sector's greater legitimacy).
Speaking of the Cayman Islands, they are about to get hammered by Hurricane Dean. Those Potemkin offices where the Boyz incorporate their mystery funds may not even be standing by three o'clock. But speaking of Hurricane Dean raises some interesting parallel issues. Texas may be breathing a sigh of relief with the storm's present course calculated to take it over the Yucatan Peninsula and into Mexico. But, as you can see from this article on TheOilDrum.com, it's a real Scylla and Charybdis situation.
The US Gulf oil fields and the Houston refinery universe may not get smacked, but it looks like Mexico's Cantarell oil field will get roached instead. With Mexico being our number two source of oil imports, and with oil imports being almost 75 percent of our daily oil supply, and with the Cantarell field being 60 percent of Mexico's oil production — well, you see how that goes. Nobody really seems to know what has kept crude oil trading just barely into the $70 range at the height of the driving season, but the two main speculations are 1.) "demand destruction" among tapped-out American consumer-motorists and 2.) desperate Big Fund Boyz ditching positions in the oil futures markets to raise cash to cover their losses elsewhere. In any case, Dean does not look good for oil prices in the US slouching toward Labor Day.
These things prompt me to say that we are firmly in a zone of pronounced instability in global finance. I have to guess that the losses and imbalances in the funds are now too grave to correct. The Federal Reserve has got to chose whether to let these outfits sink, or whether to sink the US dollar trying to bail them out. The kind of penny-ante "helicopter drops" of "liquidity" they've made the past two weeks may actually accomplish both, only just a bit slower. By this, I mean that the damage may not occur all at once but be stretched out into the Fall of this year. Anyway, the massive amounts of adjustable mortgage resets coming down through Christmas, will blow out many more cell walls in the ailing body politic. And let's not forget that one Hurricane (even a Cat-5 howler) does not a whole hurricane season make.
Accuracy is best measured in historical term. While it is common knowledge that inflation is debts' best friend, even those who understand this that fail to acknowledge that history will yet again succeed in repeating itself. The nickel Herhsey bar will no doubt cost many dollars rather than nickels in the future; humans will work for ever lessening amounts. It is after a 'global' economy. Without that continued evolution the day of recognizing will only come sooner, rather than eventually. Wealth certainly prefers eventually, as it always has.
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