Wednesday, December 27, 2006

Where does the money come from?

Hedge funds and derivatives are still a gray area to me as they may be to many readers of my blog.

Carry trades are a little easier to understand; borrow a currency from a country with low interest rates and buy currency in the form of bonds of another with high interest rates, pocket the difference and Bob’s your uncle.

If you are like me you might wonder where all of the money is coming from to fuel the orgies of mergers and acquisitions that we have seen lately. Professor Succo addresses this in the article below.

There are a lot of financial shenanigans happening right now making many young traders a lot of money. The playing field is not level and this leaves the door open for those who would behave badly.

One concern that Professor Succo’s letter to Mr. Stein does not address is the possibility that some of the foreign central banks buying U.S. dollars and assets may in fact be hostile and could participate with one another in a coordinated financial attack on the U.S. economy.

I think it goes without saying that the longer these equity schemes are in play the harder the correction will be as Professor Succo points out.

Timed correctly a coordinated shift of assets could cause a lot of problems for an economy already on a fraying tightrope. Whether or not that happens the result of a correction in the derivatives market is sure to have a bad effect not just in the U.S. but the whole global economy.
Vern


"This situation is very unstable in the long run. The Federal Reserves’ balance sheet this year alone has expanded by $30 billion in this way and created $3.5 trillion of new credit in the U.S. Public debt around the world is growing exponentially and total debt in the U.S. now stands at nearly 3.6 times GDP (1929 was 2.8 times)."

Read the full article, Global Savings Glut Revisited at: http://globaleconomicanalysis.blogspot.com/

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