Marvin: > Sabri: How would you answer the argument that most > derivatives are used for hedging operations and are > therefore a source of stability for the system?
Dear Marvin, I was tempted to open up with the following: "Are they? I did not know this!" But if I do that you may get the impression that I am attacking you. But no! Even if I opened up like that, my intention wouldn't have been to attack you. It would have been to attack the standard finance text books which claim the above. Those books are not only based on unreasonable "rationality" assumptions but also they ignore the effects of size. Soros was able to attack the UK government and beat it when he bet against the pound but I don't think even he has the ability to bet against the US market. The US financial market is a monster against which no one has the ability to bet. And that is the problem. Controlled chaos is fine as long as those who are at the reigns have the ability to pull them. But if the horses go crazy, it does not matter how good a rider you are. They decide where they want to go and they may even choose to jump of a cliff. There are trillions of dollars worth of derivatives out there with no connection to neither the real economy nor the "money supply". Anyone create money in these markets by signing derivatives contracts, as long as they have the credibility to sell them. This global gambling casino grew so big that none of the "owners", including the US Treasury and the FED, really own this casino anymore. It became uncontrollably chaotic despite denials of the alleged owners. And the casino always wins, and if nobody owns the casino, everybody loses, sooner or later. Best, Sabri
