An Easily Understandable Explanation of Derivative Markets:
Heidi is the proprietor of a bar in the city. She realizes that
virtually all of her customers are unemployed alcoholics and, as such, can
no longer afford to patronize her bar. To solve this problem, she comes up
with new marketing plan that allows her customers to drink now, but pay
later.
She keeps track of the drinks consumed on a ledger (thereby granting
the customers loans).
Word gets around about Heidi's "drink now, pay later" marketing
strategy and, as a result, increasing numbers of customers flood into
Heidi's bar. Soon she has the largest sales volume for any bar in the city.
By providing her customers' freedom from immediate payment demands,
Heidi gets no resistance when, at regular intervals, she substantially
increases her prices for wine and beer, the most consumed beverages.
Consequently, Heidi's gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that
these customer debts constitute valuable future assets and increases Heidi's
borrowing limit. He sees no reason for any undue concern, since he has the
debts of the unemployed alcoholics as collateral.
At the bank's corporate headquarters, expert traders transform these
customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities
are then bundled and traded on international security markets. Naive
investors don't really understand that the securities being sold to them as
AAA secured bonds are really the debts of
unemployed alcoholics.
Nevertheless, the bond prices continuously climb, and the securities
soon become the hottest-selling items for some of the nation's leading
brokerage houses.
One day, even though the bond prices are still climbing, a risk
manager at the original local bank decides that the time has come to demand
payment on the debts incurred by the drinkers at Heidi's bar. He so informs
Heidi.
Heidi then demands payment from her alcoholic patrons, but being
unemployed alcoholics they cannot pay back their drinking debts. Since,
Heidi cannot fulfill her loan obligations she is forced into bankruptcy..
The bar closes and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%.
The collapsed bond asset value destroys the banks liquidity and prevents it
from issuing new loans, thus freezing credit and economic activity in the
community.
The suppliers of Heidi's bar had granted her generous payment
extensions and had invested their firms' pension funds in the various BOND
securities. They find they are now faced with having to write off her bad
debt and with losing over 90% of the presumed value of the bonds.
Her wine supplier also claims bankruptcy, closing the doors on a
family business that had endured for three generations, her beer supplier is
taken over by a competitor, who immediately closes the local plant and lays
off 150 workers.
Fortunately though, the bank, the brokerage houses and their
respective executives are saved and bailed out by a multi-billion no-strings
attached cash infusion from the Government.
The funds required for this bailout are obtained by new taxes levied
on employed, middle-class, non-drinkers.
Now, do you understand?
From Me:
Yes! It's that simple. An accomplished economist once said the idea of money is so simple it boggles your mind...this is the twisted, inflated, false nature of our markets and essentially our money. It has now reached the point of complete lunacy, perhaps complete failure. And if it doesn't fail now it will in a few years once again. The crashes are coming more often now and involve more money.
What's even more simple is the cure. It's simply to go back to the gold standard as established in The Constitution. Politicians and bankers don't like the gold standard because it restricts their spending. The gold standard relies on a real commodity, gold metal, which is in limited supply, therefore spending is limited. Politicians hate limited spending because it shows how little power they have; how little power they are supposed to have as...once again, established in The Constitution.
Pardon my lunacy here but.....if your money is tied to gold, then any bubble will not get very big because there is only so much gold available. So, production or investment will have to be decreased somewhere, when production is increased elsewhere.
It's like sucking a shared milkshake through a straw; you pull it up into your mouth but now there is less for another to drink. The big investment will cause the money, the production, to be taken from somewhere else to keep the bubble going. Politicians want to have all the answers, they want to be reelected and banks want more money, more power....so they don't want to conform to natural economic laws. So they abuse the system to our detriment. They print more money, they cause inflation, they play games, and it began a long time ago.
I think economically we are now at the point of no return. Someone said it will now feel like an elephant slowly sitting down on you as prices rise, jobs do not return, and incomes stay low. But not only us, many countries are hurting by using the central bank/interest rate, system. Only thing is, they haven't abused it as much as we have, and to the extent that they have abused it, it was greatly through the sponsorship of U.S. influence.
So what does the middle class Joe and Suzy do? We should try to end the Fed, slash spending, and do away with most taxation. Right now the government has usurped all power and we are nothing. That is precisely what our nations forefathers did not want to happen again.
Of course, everyone has the liberty to choose what they want to do about this; be a sheep and continue being ignorant like many others, or speak up and share your knowledge. I choose to speak up and live according to what I value. I choose liberty. I choose freedom. I choose happiness. I choose to follow our Constitution as done for many years before career politicians and bankers stole out country from us.
But that's just me.
For Liberty,
Bill
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