Monday, November 23, 2009
Finance is charging for the time value of money
Yes but there are risk variables that have to be considered. Why is money due in the future or money lent to Mr Sketchy worth more than money in the till or lent to the Widow Murgatroyd? If the money is in your possession then it is at less risk then if you are expecting it later and Mr Sketchy has to pay more than Mrs M because he showed up last Thursday and his promise is backed by the expectation that some greater fool is going to do business with him later while Mrs. M has never broken her word in her life and has always done the same thing at the same place. Geithner and Obama are personally a pair of Mr Sketchys. They have debased the reliability of the United States. The Treasury was Mrs Murgatroyde and now looks like an aging Tart.
To parse out the connections here we have politicians and political appointees who personally lie and fail to pay their taxes or take items of value, like Obama's back yard, from criminals. They improperly take additional value, such as campaign money, from foreigners. They also promoted policies that created the conditions in which financial institutions took on risky loans and transferred those toxic assets to other institutions. They then created a mechanism to transfer taxpayer wealth to foreigners who may be linked to those who made the illegal donations or who otherwise may profit from America's relative decline. At the same time they push other initiatives that weaken the United States and increase the relative power of foreigners and reward the relative economic standing of private businesses, GE and Goldman-Sachs, whose executives gave them money or who they have hired to formulate and execute policy.
Given these conditions the interest rates would have to rise as the US is seen as no longer a safe haven for value. In addition the need to pay for the massive debt that has been generated will induce both crippling taxes and regulations, which will increase risk and raise costs as the economy shrinks, and which will also generate monetary (meaning supply as opposed to risk based) inflation.
The Democrats may hope that between now and the 2010 election the inflationary bubble may produce a "wealth effect" that will tamp down unemployment over the Summer and save some of their seats. Today they were advertising that an Economists report claims that there will be recovery with modest growth next year. This I suspect will be a Suckers Rally.
To sum up, two sources of inflation are coming. 1) Monetary based Inflation from Treasury debt service, 2) Risk based Inflation from the loss of confidence as Geithner & Obama exposed as frauds. A network of corrupt corporate and hostile foreign interests are profiting from this.
The obligations that were being traded in the expectation that the underlaying loans would possibly pay off were a form of Derivative. The first thing I learned about such instruments when I studied for a Series 7 license is that an Uncovered Call entails "Infinite Risk." The instructor repeated that slowly to make sure that we all got it. If the value goes down then you can lose the principle invested but if it goes up and you are forced to buy the asset then there is no end to how much it might cost you. He also pointed out that by definition a "sophisticated investor" who is anybody worth over $1 million, is allowed to self destruct but poor widows and orphans are protected. The banks and governments here were not poor orphans. By paying off the foreign banks at 100% on the dollar Geithner effectively paid off their assumption of enormous risk. In effect the banks were granted a Put by the US government that they did not have to pay for.