Dollar up,…no down after Bernanke testimonial in US Congress, Yen down…nope up, Euro getting stronger against dollar by the day provided EU stays, Yuan long term up, gold up, uncertain crude, interest rates up…not so sure, so are bonds, stocks – known for their lift-like movements historically now looks like a spacecraft searching for elements beyond the universe, more so in emerging markets, housing down in US but up again in emerging markets as Mumbai tries to catch up with Manhattan, economy up, inflation risks remain, e-currency, paper gold…oh yeah…I get it.

We are trying to get some sense of crazy global financial markets in some Martian language.

Mind boggling in true sense! Can someone truly tell me what’s happening in global financial markets? Where to start and how to proceed…or is it an illusion with all floating monetary measures in an interwoven-world? Without having any investments in Gold or being bitten by ‘gold-bug’, in terms of simplicity, gold-pegged economy was easier to understand.

How easy was my economy in those old gold days that Keynes termed as ‘the barbaric relic’? There was not much complexity in understanding the theories of Noble laureates in Economics…

Closed to $400 trillion of derivatives are held as open interests across various markets – mostly as interest rate swaps, but then there are forex markets, commodities, stocks…you name it…and we have a product. And we have products for those also which you and I can’t comprehend on why they exist, what purpose they serve and for whom, at what (fair) price those should be traded even after hours of study.

Markets have probably come to a point where markets know the best when markets don’t know what’s happening in the markets. In an article titled ‘If Hedge Funds kept cows, your milk would go sour’, Mark Gilbert, Bloomberg News Columnist tried to give some meaningful insights in layman’s term on what Leveraged Buyouts, Currency Markets, Bond Markets, Derivatives, Hedge Funds, Pension-Fund Management, Credit-Default Swaps, Interest-Rate swaps mean.

Well… and we may not be halfway thro’ it…add different geographical markets that are on 24X7 to that…and we have a nice recipe of magic potion that’s driving global financial markets that Getafix only could think of…

G-7 – the economic powerhouse of the world lately attempted solving one small part of that imbalance. And strange outcome followed, expectedly.

Background check: It’s common knowledge that G-7 countries have been facing a lot of cheap imports from both China (predominantly) and Japan, thereby hurting their domestic economies and causing trade imbalances. Yuan, although floating against market forces lately with an anchor that decides how much that floating should be, when this anchor is again pegged against another floating currency called dollar; and Japan, after pumping in $250 billion since 2004 in its end-less attempt to kick-start the economy isn’t still sure after five years of zero interest rate and lately of 0.25% of interest rate when it really ‘starts’ (4.8% growth reported last, quite high than what was expected). Dollar continues its downward move with Bernanke’s comments on US economy to Congress; however yen outpaces that even faster because of the existing 5 % interest rate differentials. So the talk of the town was both EU and US would ask China and Japan to strengthen their currencies.

However when the official outcome came up, we hear Japan got it easy and China paid what was expected.

Let’s try to imagine what went ahead in recent G-7 meeting, outcome of which was soft on Japanese interest rate but strong on Chinese exchange rate.

Japan pleads: My Lord, I have been going thro’ a recession to stagnation, consumerism in my country does not grow even if I say there is no benefit in savings and I am ready to give as much money to anyone as anyone wants it. True, Government debt in Japan is highest (in terms of size of economy), but we can go up further as we create money.

G-7 declares: Amen! Fair point. So China…what have you got to say to your trillion dollar+ forex reserves and mounting trade surpluses?

China pleads: My Lord! I am a country of 1.3 billion people, more than 10 times the size of Japan, of whom you just heard. And my economy is barely half of Japan’s economy. So it’s obvious that people of my country earns hardly 1/20th of what Japan does, and consumes 5% of what average Japanese do. So if Japan can be allowed to increase consumption of its economy by keeping interest rates low, I have 20 times more reasons to peg my currency (which lately I have changed even) against the global currency. Yen is depreciating against your currencies; at least Yuan is appreciating, well at a slower pace than what you want. You can’t push me to do any better.

G-7 declares like the outcome of Saddam trial: No, you are guilty; and need to do more.

So…there we are in understanding forex rates and interest rates and floating currencies and pegged currencies. And hold on…how does market react? Yuan falls temporarily and in Japan, people start buying bonds! Are we missing something there or are we missing everything there?

The stupid man inside few of us is not satisfied. He says…get to the root…try to understand the balance sheet of the world. Not in the sense of that balance-sheet of Mother Earth, we know we have screwed that up as evident now from global warming. But that of the Banking System driven by Fractional Banking as we understand…the source of all the money that we have in the world.

But where from to start, how to start, and what are the assets and what are the liabilities. Central Bankers follow different accounting system than what corporate world follows, a future liability is taken at its present value and not at its future outgo…so debts pile up, and eventually more debt is created to service existing debts. Money supply expands exponentially in an expanding universe. And the first trillion of Money Supply in dollar happened only in 1970s in the US, and now that’s close to $12 trillion, and as exponential theory suggests, Money Supply (M3) needs to grow exponentially only to support the self-fulfilling policies of present day economies of pumping in more money as long as the forests of the world can produce that paper. When that fails, we have thought about that in the form of e-currency. Overall cumulative US debt – Government, Corporate, Retail combined is more than $50 trillion, more than the size of global economy in nominal terms. (Can’t help but recommend a very good but long narrative article in this context titled I Want The Earth Plus 5% which many may know of). Compare that with US economy of $12 trillion, tax revenue of closed to $2 trillion but running on deficit, retail savings negative to 1% of GDP, and more Social Security spending in coming days as baby-boomers start retiring.

So how and when does one pay back? Simple arithmetic suggests payback not possible in our life time considering the best possible hypothetical scenario.

Increasingly one gets lost between theories and conspiracy theories and doomsayers’ theories. US Dollar needs to fall, and billions of dollars have been put in different instruments anticipating dollar’s unprecedented but long overdue fall, members of which include legendary figures like Warren Buffet. Gold would hit three digit figures (in US $/t oz) and then no amount of paper money would be able to buy physical gold because in the end paper is paper and gold is gold, believes the Gold-bugs. Fiat money, as it is now, is nothing more than a promise of the Central Bankers (and whether US Fed qualifies as a central banker is again questioned by leaders of conspiracy theories, with evidence). However these theories were there back in the past, they would be there in the future and that’s only expected. True, their voices are getting louder by the day, but how loud is loud is again the same question that leads to another on how much money supply is indeed a ‘hell’ lot of money supply to destabilize global economy, and bring income divergence to its maximum practical possible limit.

And with nation states, things only get more complex. Most data come from US as that’s the data-driven economy. We have inflation data (different types again, and doomsayers’ don’t believe official data as that don’t include ‘stealth inflation’ as ‘they’ claim real inflation to be closed to 15%), we have employment data, we have trade deficit data, we have consumer expenses data…oh yeah…lately their anti-terrorist squads are getting our bank statement data (may not be released publicly) as well as I understand from some media reports, more so for any people who visit US.

Even with so much money in global financial systems, closed to half the people in this world haven’t managed to earn 2 dollars a day. So labor still remains cheap, supply of goods have catapulted – thanks to China and other emerging export-driven economies. Developed countries, though they are getting their goods cheaper by the day even with increased money supply, may face problems with employment (so far so good here as employment remains in pink of its health in most developed economies, many don’t understand how, and lately unemployment figures in US is creeping higher, touching 4.6%) and cry for ‘localization and protectionisms’ against ‘globalization’. US economy gets more than 80% from services – God only knows what services the Americans consume that make size of their services economy more than 16 times the size of services economy of China, when China has more than four times population. So a child-birth in US costs 64 times more, a hair-cut, a visit to a nightclub or costs of education in US is 60 times costlier in US than in China when goods are getting almost uniformly priced all over the world.

Doesn’t make much sense…does it?

So how do we read the balance sheet of global financial system? Management gurus advise us ‘visit the market whenever in doubt’. One of my friends, who traveled all over the world frequently, came out with another hypothesis. He said that he found visiting and communicating with different stakeholders in any nightclubs of any country provided him with an inner insight of that country’s economy (shoddier the joint is, better that is with insights of legal administrations). No denying him by any who have ever been to any nightclub…but that only explains that country’s economic and social health. What about global financial system assuming we had one single central banker in this world, and all other central bankers of the nation-states as different divisions of that central banker. Is the health of that single global central banker is of any concern or is it in its pink of health? Which divisions are causes of concern and which divisions are pulling it up?

I don’t know. It’s all so confusing that the analogy probably speaks of the ignorance only. However, there is a concern lately all over the world on complex financial instruments (derivatives, and derivatives of derivates and thereof), very high open interests, hedge funds and their risk appetites; however no one seems to know when enough is enough.

Many who continue to live in this complex firing line of interlinked global financial world lately know what it means to be there. You never know what’s going to strike you next – it’s a situation like present day Iraq where one may be a casualty from Shia Militia, Sunni insurgency, Al Qaida terrorism, US allied forces bombings, Iran-backed or Syria-supported insurgency, or even a victim of your own Government killing you because Government didn’t know what it was doing and who you are. Before you come to know what did hurt you and why, you may well be dead with your positions. One participant living on high-risk-high-return instruments in global financial markets, bearing this risk daily apparently stated ‘I wish I could have taken up a less stressful job, something like that of a bomb-diffuser’.

So very true for people who live in the floor and by the floor. What about the majority of us, who at most take a cursory glance at global financial markets, or at the indices of our own nations? Are we risk free? Indeed?

Doesn’t look like as we all know what happens in any major economic depression? The stake here involves us all. Policy-makers take us to war promising that’s good for us; we believe them and pay dearly. Policy-makers of nation-states run a competition of money-supply promising that’s again good for our local economies in comparative & competitive global world, we believe them (we don’t have a choice, have we?).

It’s never prudent to hide the skeletons in apparent good times (what we are having now, globally for some time) so that they finally emerge one after the other when bad times strike us. Global economy seems to be heating up, all over with alarming signs of imbalances with real money (goods and services) flowing from poor nations to rich nations against credit money. We don’t know whom to believe – the official versions (call it theories) or the conspiracy theories who now claim that there doesn’t exist an iota of chance of Governments, in most major economies, paying back its debt. We know Governments lie, not always but it’s hard to find a single Government anywhere in this world who didn’t lie to its people knowingly. And money, that makes this world go round in this fiat fractional banking system, is based on a promise of the Government (its central banker). What’s the likelihood that Government won’t fail in this promise as well (remember 1971 when Gold Window was closed, it eventually faltered on the promise made by a global body in 1945, within 26 years of formation where it claimed “This Conference at Bretton Woods, representing nearly all the peoples of the world, has considered matters of international money and finance which are important for peace and prosperity. The Conference has agreed on the problems needing attention, the measures which should be taken, and the forms of international cooperation or organization which are required. The agreements reached on these large and complex matters are without precedent in the history of international economic relations”. Nixon could easily make that promise go bust when US unilaterally closed ‘Gold Window’. And now, after 36 years of its fall, without any system we don’t know where we are heading).

It increasingly looks like that ‘fiat’ promise would remain a perpetual promise whose value in perpetual end becomes the paper on which it’s printed on. And it increasingly is difficult, if not impossible to make meaningful sense of global financial markets involving that all important money, unless we know how money gets created and why.

Bernanke have attempted some plain speaking in US congress on state of US economic health in reference to rest of the world, unlike his predessor, legendary Greenspan, who was not understood by most. We hope someone attempts doing that to global citizens on global economic health before the inflated bubble, in which many of us are having our joyrides from unprecedented highs without our parachutes on, bursts up in the sky.
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