Commentary: Boom to bust

Borrowing $2 billion to $3 billion a day from other countries to maintain the world’s highest standard of living, based on conspicuous consumption, in an age of growing world shortages, while fighting two wars whose costs will soon ring up a $1 trillion tab, is tantamount to living on borrowed time. Valium and Tylenol sales are up, and Viagra down, in the banking world. So far, the subprime tsunami has wiped out half a trillion dollars from the books of major financial institutions in the United States and Europe.

… Over the weekend Deutsche Bank said losses from “securitized” subprime mortgages were heading for $400 billion. Wall Street insiders said it would be more than $500 billion. The dollar is being described as the leper at the birthday party. Fear of contagion is everywhere. So when Paulson said, “A strong dollar is in our nation’s interest and should be based on economic fundamentals,” he looked and sounded like Popeye violently wiggling his buttocks to extricate a can of spinach. But the magical powers of spinach can’t stop the train this time.

According to the Bank for International Settlements in Basel, Switzerland, another massive bubble that keeps ballooning is the derivatives market, which has quintupled in five years since 2002 to more than $500 trillion — not billion.

The magnitude of the $500 trillion derivatives bubble is brought home by America’s largest dollar figures: GDP ($15 trillion); federal budget ($3 trillion); U.S. government’s maximum legal debt ($9 trillion); and also by the GDP for all nations ($50 trillion); and the total value of the world’s stock and bond markets (more than $100 trillion). By way of reassurance, BIS’ 2007 annual report also says that the $11 trillion “gross market value provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets” every day.

Terra Daily