Castles in the air

The total value of the goods produced and services provided on the planet came to $54.3 trillion last year. That is an astronomical figure. But, one can argue, there are a lot of people on the planet and they are all busy producing and consuming, to a greater or lesser extent, and all of them contribute to this global turnover. So all those trillions can be explained, if not understood. But that which defies all understanding is the fact that, at the same time, the global market in so-called «derivatives» is even greater, being estimated at $55 trillion. These derivatives are the product of what turns out to be a largely arbitrary process in which the financial sector takes bets on whether real debts will be paid. They are contracts that are sold to investors to secure the payment of debts, and their value rises and falls according to the creditworthiness of their debtors. Banks, insurance companies and hedge funds participate in this market. In other words, by placing bets on numbers conjured out of thin air, the bright boys of the global economy were able to provide themselves with huge profits and «management percentages» for taking real money out of a balloon of investors’ funds that just kept growing. Everyone won… until now. Out of control, the derivatives have become the cancer that is eating away at the global economy. The money that major central banks have promised to support their country’s banks and encourage lending, so as to keep the economy from withering, comes to about 2 trillion euros. Other than contributing to the restoration of some trust, this amount, on its own, cannot drive out the huge uncertainty that sits at the heart of the global financial system: Who is holding all the debt, and who will get stuck with the bill in the end? This is the uncertainty that drove Lehman Brothers to bankruptcy (they held $110 billion in bonds and $440 billion in derivatives, from which creditors got back only 8 cents to the dollar). This is what forced AIG, Iceland’s high-flying banks and many others to come under state control. Last week we saw all the major (and minor) stock exchanges falling uncontrollably, shooting upward and then dropping again. In 2008 alone, $25 trillion was lost on the stock exchanges, with unpredictable consequences for investors but also for those whose pensions may have been invested in funds that have vaporized. Companies that cannot borrow, or which have lost customers because of the crisis, will have to let employees go. The oil market is already budgeting for a recession: The figure of $147 per barrel that we observed this summer has now dropped to around $70. This crisis, however, is not only hurting the poor and the middle class – the usual victims. Now the rich, too, are in trouble. Hedge funds are beginning to close. This year, they have lost an average of 17 percent, after years of making about 20 percent annually. About 10,000 of the sector’s 130,000 employees are expected to be fired. Since July of last year, the bank sector has seen 131,000 layoffs. On Friday, the European commissioner responsible for the internal market and financial services, Charlie McCreevy, spoke of the «pressing need» for the derivatives market to be made more secure through the institution of a central supervising mechanism. That sounds good, but the black hole has already been created. It is bigger than anyone can conceive, and bigger than the real economy can cope with.

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