How Big Is This Problem, Anyway?

23 09 2008

Warren Buffett called them “financial weapons of mass destruction” six years ago.  But how big is the problem?  Surely if the all-powerful government steps in, all is well, right? Not so fast.  This ought to give you a pretty good idea of the magnitude [Yes, that little speck on the left is the entire US money supply]:

[Source: US Global Investors]

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The Big, Fat, Fluffy and Precarious Financial Fauxconomy

16 10 2007
NYC - Bowling Green: Alexander Hamilton Custom...

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I’ve decided to start calling the troubled so-called “financial economy” the fauxconomy. There are large parts of the global economy that are sound and adding value to life and contributing to the advancement of a responsible, fair (and profitable) society. The problem is, a great deal of them are denominated by, traded and financed through a system of derived financial instruments that are so complex and abstract and removed from any actual value creation of that they are simply vapor – vapor that is starting to prove quite noxious.

So, while the world economy is full of value-producing activity, almost every corner of it is infected by this enormous financial fauxconomy that some estimates put at more than $350 trillion. That’s right – $350 trillion – around thirty times the entire US gross domestic product. How can this possibly be righted without us winning some kind of cosmic Powerball?

While I want it to, I just don’t think it’s going to be possible to disentangle this shit from actual value-producing activity without quite a bit of intermediary chaos. And most especially not with $100 a barrel oil, a plummeting US dollar, and an apocalyptic madman Commander-in-Chief seemingly poised to provoke a serious brawl with another apocalyptic madman Commander-in-Chief. [The latter, Mr. Ahmedijinad, being well-poised to make $100 a barrel seem cheap when he closes the Persian Gulf and then inquires as to who’s our daddy.]

But in regard to the fauxconomy, I was quite creeped out by this October 15 WSJ piece about the Big Bank micro-bailout fund they scrambled together with Treasury last weekend. A sampling:

“Ironically, by working with the U.S. Treasury Department to develop the plan, big banks such as Citigroup Inc. are admitting things are bad and that their options aren’t pleasant.”

Somethin’ to chew on, kids. I know I’m shrieking a lot about the markets these days, but things are exceedingly stonky and it’s on my mind and it’s making me nervous and I can’t help myself.