Shit Unhappens (James Kunstler)

[Tace]

James Kunstler -- Clusterfuck Nation

Sept. 25, 2006 -- The story this coming week, I think, will be how much the collapse of the Amaranth hedge fund may end up infecting other "playas" in the big leagues of finance. Hedge funds being what they are -- rackets using "leverage," or other people's promises to pay, to make bets on "spreads," or differentials in other people's bets on the price of things -- there are a lot of other people out there who might get sucked through the event horizon of one big fund's black hole of bad betting.

So far -- through the weekend of the 23rd and 24th -- the banks and other manipulators of capital have been successfully quarantined from the Amaranth infection. Sunday night, as I write, the business desk reporters are waddling back to the fridge for a second bowl of Chunky Monkey. Many of them will go to sleep in a few hours thinking that the price of gasoline is headed down further and all is right with the world.

But the Amaranth fiasco has made about six (or is it eight?) billion of somebody's dollars disappear. Either those dollars have meaning, and those somebodies will suffer from the loss of them, and so will the people who the somebodies owe money to, or else the dollars will have had no meaning per se -- they may not have been dollars so much as IOUs denominated in dollars, or loans of bundles of IOUs, or promises of future loans of bundles of IOUs -- in which case their value as a medium of exchange will be perceived to be less than was previously assumed.

This is what comes of living in an economy of hallucinated finance instead of an economy of wealth-generating work. It all seems to add up until the old assumptions just don't add up, and then things break down.

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[displacedtexan]

1. "Virtual Economy"

I read that phrase this morning on a housing bubble
blog (I forget which one), and I thought it made
a lot of sense.

It was in a comment after someone had written that
s/he was planning on 7% profit from his/her Amaranth investment.

[Tace]

2. A Great Unknown About The Global Economy And Derivatives...

is that this has never been tried before to this extent on a global scale. Derivatives themselves date back only a few decades... and the dollar-volume of derivatives has literally exploded... doubling each year (or something like that, I'm not sure the exact figures). Anyway, it's anybody's guess how this is going to play out. Even with a good-case scenario, there's bound to be some big bumps in the road ahead. I don't envy the central bankers (except, of course that they can print money and sell it to us. What a sweet gig.).