At the outset you need to know that I am a theoretical physicist and not a stock broker or commodities trader. But I have been trying to follow the news. It is full of terms such as "mark to market", "credit default swaps", "quantitative easing" which at first meant about as much to me as "Bell's Inequality" might mean to some of you. But I am stubborn and decided that if these things are going to determine my financial future I better know what they mean.
The first thing that becomes clear when you look into the matter is that these concepts are part of a virtual economy. They are not like the "real economy" where, after you go into a grocery store to buy eggs and milk, you come out of the store with eggs and milk and not an option to buy eggs and milk at an agreed price at a later time. If you buy a "credit default swap" you come out of the transaction with a piece of paper-or more likely a computer file-which has no intrinsic value. If you imagine a situation in which you are confronting an aboriginal tribe you might get somewhere if you have beads to swap, but not if you have a credit default swap. These financial instruments are rather new. The commodity they trade in is money. They are very clever devices that were thought up by very smart people to make money from money and they are in the process of doing us all in. I am somehow reminded of something that the great German mathematician David Hilbert said about astrology. If the ten smartest people in the world got together they could not think of anything as stupid as astrology. Now to the glossary.
This is such a complex subject, and so fundamental, that I am dividing this entry in the primer in three parts. This one, 101, gives the basics.
A derivative is a financial instrument whose value is derived from the values of other financial instruments that do have value. For example if I buy an option to buy some stock in the future at some present price, what determines the value of the option depends on the future value of the stock. The question is, what is such an option worth to me now? To understand this better let us consider a specific example.
The panic hasn't even started!
As ordinary citizens with no power over the levers of policy, we watch from the sidelines, and weep. The whole global economy has tipped into a downward spiral. Trade and output are contracting at rates that outstrip the leisurely depression of the 1930s. Debt deflation has simply washed over the drastic measures taken by governments everywhere.
Judging by the latest Merrill Lynch survey of fund managers, investors have a touching faith that China is going to rescue us all and re-ignite the commodity boom
Get ready for higher long term interest rates
Higher U.S. interest rates will be due to:
1. Higher inflation; cheaper dollar. T-buyers are demanding a higher
interest rate to compensate for inflation and the falling dollar.This
inflation is caused by higher world commodity prices and is outside
control by the Fed Reserve.
2. Foreign sovereign funds are pulling out of U.S. Treasuries. The
Chinese economics minister and OPEC spokesman and others have already
announced this pull back Foreigners, who own more than half of our $9.5