Howdy Robin,
For every million dollars worth of goods produced by a manufacturing
company, the firm must have 3 millions in cash to operate.
The firm must either own it or borrow it. The US has a market based economy
that exceeds 14 trillion dollars per year. That spells 42 trillion in
credits, loans, bonds or stocks worth 42 trillion in cash or equivilant
float during the year for the USA alone. Add other nations burgeoning
enonomic demands for funds and there is simply not enough money to cover all
the float. This opened to door to what is described as derivitives and the
world now holds some 550 trillion dollars in IOU's. Most of them are
worthless but nobody knows which. and nobody cares unless forced to prove a
value for one.. which can't be done.
An example of how they have evolved into make believe can be learned by
studying two recent blowups.. Bear Stearns and Carlyle Capital. The world
demand for cash or equal is so great that interest rates on loans to
business can be 20% year. An entity puts up 100k in cash to buy a 1 mil bond
that pays 10% year.He has his actual cash outlay returned in a year. Since
everybody in the investment banking industry was doing it.. so it was ok and
besides the govt needs the money to run the Iraq war on credit now exceeding
5 trillion spent. In the case of Bear Stearns and Carlyle Capital.. the guys
were NOT even bothering to put up the 100k down on the mil in bonding...
they furnished an IOU. Kabloom ! the thing got outa hand and they wound up
with 600 billion in paper airplanes that wont fly. Now for a firm with a
supposed capital base of some 30 bil ... holding worthless bonds with face
value of 600 bil can keep ya awake at night. Are any other investment
bankers playing this game?? the question should be .. is there anyone NOT.
Carlyle Capital.. a wanna be .. bought some of these worthless bonds and
borrowed 31 times their face value in order to loan the money out at super
interest rates to businesses desperate for funds to keep their superheated
sales going.
The fed could have let the bear fall.. except.. err... well.. what's the
alternate ?? shut down everything on earth.
Richard
Robin wrote,
This contains some mind boggling numbers:
