Evil Are Most Derivatives

 

EVIL MAY BE DERIVATIVE, BUT IT IS STILL EVIL.

Abstract: Germany, a republic, has seized the destiny of its currency in its hands, by outlawing some "derivatives" and "naked shorts on financial stocks" (when, unbelievably, financial pirates sell what they don’t own yet).

Meanwhile, finally, the Obama administration is pushing through a financial bill that has some teeth against so called "Shadow Banking", the vampire that hid in the night to suck the world dry.

The tyranny of "Shadow banking" and its associated derivatives has drained the developed world out of capital. Most capital was confiscated by an immense conspiracy hidden in plain sight behind notions so complicated that people fall asleep before understanding them, any time they try.

That is precisely why finance was made so complicated. Thus the prestidigitator makes elaborated moves and lenifying speech. But these prestidigitators of evil are part of the same establishment that makes war all over the world, as they invite us to bathe in oil. So let me present some simple aspects, again, of the greatest larceny that ever was. (As the Senate will now debate with Congress on the financial regulation bill, this is timely.)

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The financial pirates and their media and academic helpers have been using the grossest propaganda to come to the rescue of financial piracy as an industry.

In particular, the popular right wing talk shows in the USA are making a relentless drive against the "progressive". Those are people so extreme that they view Franklin Roosevelt as a "dictator" (Glenn Beck said as he evoked with horror the financial reforms of Roosevelt, which brought unprecedented calm and prosperity until they were dismantled by Lawrence Summers). The rabid, but very popular right wing talk show hosts are amply helped by university professors, just as the Nazis were.

When the Nazis showed up, a mistake was made by people who thought progressively: they did not take the Nazis seriously. The technical point is this. Those right wing extremists think, like crocodiles think. Thinking does not make the croc right, but it makes it much more dangerous. The croc does not think very well, still, it is the duty of the intellectual to outwit it. Otherwise the intellectual will be killed, just like the innocent children were, by the Nazis.

As it is right now the direct "defense" budget of the USA is 708 billion dollars (without counting the budget of the secret "intelligence" agencies, including the CIA, which may well be above 30 billion). This is about half of the federal budget of the USA under G. W. Bush.

The same people who love financial piracy also love "defense" budgets getting ever more enormous. It is the same general idea of predation onto others, predation onto the world. To have a vague idea of the consequences, please visit the nice beaches in the Gulf of Mexico, and enjoy the oil. Otherwise, think of the dead in Iraq and Afghanistan (two wars arguably started decades ago by agents of the Western powers, agents of the shadowy type; this, by the way, goes well with "Shadow Banking", and this is no coincidence.)

A recall from history, 2070 years ago: so preoccupied were the plutocrats with smothering the Roman republic, that they let pirates gain control of the Mediterranean. Even on the sea closest to Rome, it was not safe. The young Caesar himself was captured, and held captive in Corsica, until a colossal ransom was paid by his family (as the pirates let him go, he promised to have them all crucified). At the time, pirates controlled entire regions, and possessed large fortified cities and their ports. Earlier Rome had controlled the entire Mediterranean sea. But no more. Pirates ruled.

Finally the republic had enough, and gave full powers to the very young and famous general, Pompeii. To everybody’s amazement, Pompeii destroyed all the pirates, throughout the Mediterranean, in three months. Three months. It had proven easy to destroy the pirates. What had been missing was trying to do so. We are facing a similar situation, with the financial pirates. They can be easily destroyed. All we have to fear is greed itself, among those who lead.

Recently the New York Times ran an editorial about "What Is Philosophy". The author, a paid philosopher, meekly proposed that philosophy consisted in "taking one’s time" (from something Socrates mumbled). Another philosophy professor commented more soberly that anybody who, like himself and the NYT author, was paid for philosophizing, was not the real thing.

I fully agree with the second professor, and would go further. We may also have the same opinion about economists. Economists hide behind jargon and mathematics, but the field is fundamentally philosophical: economy is about managing the house, not about assembling dissembling jargon, as salaried economists seem to enjoy doing.

Notice that, far from being professors, most significant philosophers were rebels. Those who were not rebels, such as Kant, a professor to the Prussian state, in Koenigsberg (now Kaliningrad) taught what the state wanted them to teach: obedience. Eichmann, the notorious mass assassin of Jews, said that he applied Kant’s teaching strictly, and quoted him cogently during his trial in Jerusalem. Hegel and Heidegger are other examples of "philosophy" professors serving the state (the Nazi state in the second case, and many lost souls still believe Heidegger to be a genius).

The Obama administration, and others (Krugman, Johnson, Stiglitz, etc.) have said that they want to prevent a repeat of the crisis of 2008. But that is too meek a point: the whole developed world economy is crashing, and it has been crashing for a full decade; 2008 was just a bump during a much larger crash.

China and India are not crashing though, precisely because they have (giant) government banks, doing what banks have always been supposed to do: sheltering savings from savers, lending them to worthy projects in the real world. This activity develops the economy. The two largest banks in the world, by far, are Chinese, and no doubt the severest punishments are ready for their managers, should they misstep.

It is revealing that the "developed" world is called developed, as if it did not need to be developed any further, an implicit admission by plutocrats that, from now on, only their own fortunes shall develop significantly (so called "GDP" growth).

In the fractional reserve system (be it in China or the West, such is the system), banks are always government, privately managed. This is so true that the central bank of the USA, a creature of the banks, is also viewed as a government entity.

Why is the developed world economy crashing with its research, basic services, employment and, um, further development? Why are China and India developing by leaps and bounds? It is two sides of the same question. "Developed world" banks have been allowed to confiscate most of the capital, and trade it among themselves in an unreal market, the derivatives.

There are many types of derivatives. As their name indicates, they are all derivative to functions in the real world. To describe most of them as insurance or equity is inappropriate. Honest to goodness derivatives have existed for 5 centuries, in Japan, China, and Europe. They existed for about a century, in connection with the future prices of farm products, in the USA, in Chicago. In all these cases, they were appropriately provisioned contracts. They could, indeed, behave as insurance (a farmer could insure his real world production with futures going the other way, and since he was the expert, it would profit him, a bit as a casino can rig the bets to profit from them, just so).

Not so anymore today. The derivatives the world economy is crumbling below today have become a metastatic cancer devouring all capital, and more, pumping all the world potential energy, and more.

Thanks to Rubin and Summers, those plutocrats serving themselves and their kind, under the naive puppet in chief Clinton, derivatives were derived from anything whatever, in all and any ways. For example derivatives squared, derivatives of derivatives. A market of these derivatives was made, consisting in bets among banks and hedge funds about how things will go. This "market" became as large as twenty times the entire world economy. Hidden from view was the fact that this was all public financed (be it only from the zero interest rate policy).

The defense of derivatives by finance professors would be hysterically hilarious, if the leadership by financiers had not been so tragic already (from the wars they caused to the poverty they fabricate) . To say that "If derivatives are bad, then so too is the equity in any type of company, small or large, private or public, including those that produce real products and commodities…" is revealing: the author, a finance professor, thus admits implicitly that derivatives produce nothing real.

Question: can we afford to have most the world free capital producing nothing real? And, since the banks have the fiduciary duty, through the factional reserve banking system to leverage public money into the money most people use, how can we tolerate that most of our money is used for nothing real?

When 300 billion of house mortgages defaulted, up to 24,000 billion dollars of derivatives were potentially lost, in the USA alone (Europe has its own derivatives too).

Insurance without any funds to pay for it is pure theft. This was the case of Credit Default Swaps. The taxpayers were left with the bill. The plot between Goldman Sachs and AIG was nothing more than planned robbery, and the government, represented by Paulson, past chair of Goldman Sachs, seconded by Geithner (who was paid by the banks), played its role.

Derivatives such as naked shorts are little more than taking fire insurance on the neighbor’s house with the ability to set it on fire in all impunity.

Derivatives ought to be allowed only when safe, and effective, for the people and entities engaging in these contracts, and for the system at large, which is the entire world economy. The world cannot function when the derivative is twenty times bigger than the real thing. Those who do not understand that ought to take the most basic calculus class imaginable.

I understand, though, that the incredible leverage provided by derivatives has created an entire corruptocracy, from financiers to their valets teaching the wrong notions to the young and naive. They don’t need to know calculus: being dominated by greed is enough to them. Greed is not just good, it’s the only thing. Even calculus cannot stand in the way of greed, they think, and they bleat.

Loosely, but correctly, calculus says that the derivatives are always much smaller than what they derive from. But today’s corrupt financiers adulate derivatives that are twenty times bigger than what they derive from (calculation: yearly "GDP" of derivatives divided by worth of GDP of "developed" world).

It is always revealing to listen to the fanatics of derivatives, and shadow banking. When you inform them that banks should be forbidden to speculate (a principle espoused by Sarkozy, president of France, and Volcker, past Fed chair, and adviser to Obama), they do as if you were naïve. They always say:"Oh, if you outlaw this, and outlaw that, the banks, and hedge funds, will do it in the shadows, where the government will not be able to see anything, or do anything."

That is funny, because those contradictors, those plutophiles, assume that financiers can easily violate the law, that is apparently what they do best: they just have to go back to the shadows, and do their thing, and can get away with it. Question: what happened to the state of law?

Well, the time has come for the republic to grab a few of the biggest financial geniuses, and make believe "philanthropists", and send them to jail for a long time, for financial piracy. Examples are always instructive.

So what is evil? Well, the will to hurt others, just what derivatives have been doing. Evil is a derivative of survival, but that does not mean we should worship it, as if we were crocodiles, eating each other. How do we get out of it? Well, by being genuine, not derivative.

Patrice Ayme

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P/S: One finds above a hard mathematical idea: the derivative OUGHT to be less than the function it derives from. This principle OUGHT to be imposed both globally and locally (on the set of all derivatives, and on each derivative too). Not having it is tantamount to pathological mathematics (of the sort called counter examples in analysis: a highly fractal function can be smaller than its derivative, but such functions do not exist in the real world, except at the Quantum scale; imposing them boils down to imposing a macroscopic quantal world, where prediction is impossible, and catastrophe, the norm).

Economically that will force created money back into the real economy, where it could be used to prevent oil spills and make fusion-fission reactors, besides teaching the young.

In any case, my principle, that the derivative OUGHT to be less than the function it derives from, ought to guide regulators. Call it the Non Pathological Requirement.

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9 Responses to “Evil Are Most Derivatives”

  1. keith Says:

    Patrice,

    I very much enjoy your work.

    But one little thing here — the derivative of exp(3x) is 3exp(3x) — which is larger than the function of which it is the derivative:

    3exp(3x) > exp(3x)

    The derivative of x*x is 2x,

    and 2x > x*x for all x < 2.

    In math derivatives can be far larger than their functions, without going into fractals for examples.

    Sorry to intrude. Please go on with your thoughts. it's a complex subject, so no need to confuse things anything more than need be.

    If I had to try to explain this financial mess to the public I might simply use a simple stock option example to show how a stock may appreciate by 20% while at the same time an option on the same stock may increase by 250% or more.

    It seems to me you want to illustrate that the set of wagers on the tangible wealth has reached valuation exceeding the tangible wealth.

    It’s a very general problem — not only in the exotic deregulated casino of present day hedging. Don’t forget simple, prosaic cases of stocks bid up far far beyond any possible value they may have had — there are endless examples as you no doubt know.

    But as for the present situation, I for one would leave the pure mathematical idea of the derivative aside if I were looking for mathematical analogies. It reminds me of the crazy world of quantum electrodynamics — where all the exceedingly clever calculations of electron mass and magnetic moment and so on diverged — until some people invented ‘renormalization.’ Which was thought to be funny stuff at the time.

    Not sure how fitting the analogy is — but they both (finance and QED) do seem to concern themselves with virtual realities.

    Anyway, not to criticize. I very much enjoy your work and the far ranging insights you bring to bear are most impressive and very thought provoking.

    Like

    • Patrice Ayme Says:

      Keith:
      Good point, the analogy with QED. I propose to RENORMALIZE, indeed, the derivative df/dt according to the effect it has on f itself. This is actually what QED and QFT do. there, the function f is given by nature, whereas on Wall Street, nature does not exist, and what is counter to nature is best! So we propose to go back to situation where only trading in df/dt that moderates f is allowed. and to get there, trading would be renormalized: renormalize as you go!
      PA

      Like

  2. keith Says:

    Patrice,

    Please forgive me for addressing you incorrectly in my first response!!!

    This is more old age and dyslexia on my part than anything else and I am very sorry to have made such a slip.

    Always Yours,

    Keith

    PS I think your post discovered one of the inherent pathologies in the derivative financial plane. You express the moral outrage, which can get the best of one. One of the things here is to let the public know just what it is these things encompass. In fact derivatives of mathematical functions can and often are MUCH MUCH larger than the underlying function.

    Ex. f(x) = sine(2500x); df/dx = 2500cosine(2500x)

    f as the sine, whatever the frequency, can never take on a value greater than 1.

    But its derivative in this example has a maximum value of 2500 (!)
    And if x is related to time then these maxima of df/dx occur rather frequently in one cycle due to the large frequency.

    Better that people understand these things. Hard to sort it out with so much else going on.

    There is of course another type of change, as you have often brought to attention: changing the rules of the game of finance! Here it is as though the world’s financial system has been the subject of a computer simulation! Someone pointed out, by the way, the similarity between CDSwaps and insurance. BUT, the weren’t called insurance and were not subject to those laws and regulations. In fact it wasn’t until several decades in the west after the selling of commercial insurance, that it became law that for someone to take out insurance on something, they must have and ‘insurable interest’ in the thing insured. You can imagine prior to this the abuse that occurred. Are we now not in a somewhat analogous situation with these new unsecured instruments?

    It would seem to me that the very inordinate value which the derivative instruments can take on very quickly (imagine our sine(2500x) as an example) in proportion to the values of the underlying stocks, bonds and commodities would (and no doubt do) cause the need for huge sales of the underlying assets to unroll the derivative positions. Sucking out liquidity, as you so cogently remind us, and potentially destroying wealth, confidence, and of course, the ability to create wealth in the way learned over so many years.

    Like

    • Patrice Ayme Says:

      Keith:
      Thanks for the thoughtful answer. Very good mathematical observation. Any high frequency function with have a huge derivative. Actually the wise guys on Wall Street have discovered this deep mathematical truth all by themselves, and they exploit it. In your example the derivative varies between +2500 and -2500.

      Maybe the way to look at it would be this. Given f, look at df/dt. If absolute value of df/dt is X, then use it to limit not just the size of the leverage allowed, when trading df/dt, but also overall, how much trading is allowed in df/dt, in the light of the fact it is supposed to moderate f, not amplify it. So only countertrades on df/dt could be allowed, as X(t) evolves, with delays, etc… As you say, “Hard to sort it out with so much else going on”. I hardly have the time to derive a correct financial theory of stabilizing derivatives! …. But maybe you can… Of course many on Wall Street would not be keen anymore than the some in the mafia would be keen to develop a treatment for organized crime. However, they should, because the collective opportunity loss in the advancement of civilization has become too great.
      PA

      Like

  3. Sherry Jarrell Says:

    I just want to warn any reader that Patrice, in addition to misquoting and mischaracterizing my post, fundamentally does not know what he is talking about on this topic. If you have any questions for me, I’d be happy to explain, but I refuse to waste any more of my time trying to engage Patrice in any meaningful dialogue. It is truly hopeless.

    Sherry Jarrell

    Like

    • Patrice Ayme Says:

      I do know what I am talking about. Just an example. The fact is AIG had sold around 180 billion of Credit Default Swaps, for which it had made no provisions. This was an insurance against the default of some credit instruments, but AIG had no money to pay said insurance. Instead the US taxpayers had to.

      I notice that Sherry “refuse(s) to waste any more of my time trying to engage Patrice in any meaningful dialogue”. More misquoting and mischaracterizing of mine, no doubt.

      Germany and her conservative Chancellor, Angela Merkel, a lady of substance, a former PhD physicist, has just outlawed some types of derivatives as dangerous to German national security.

      Here is a quote from another site:
      ” Webster G. Tarpley
      TARPLEY.net
      May 19, 2010
      Germany and Europe have now made some promising initial steps in the direction of their necessary self-defense against the depredations of those zombie banks and hedge fund hyenas who have been organizing a massive speculative attack on Greece, Spain, Portugal, and Italy with a view to destabilizing the euro and perpetuating the world hegemony of the troubled US dollar.
      The most significant of these moves is the ban imposed unilaterally by the Merkel-Schäubele Christian Democratic-Liberal German coalition government to outlaw the use of high risk derivatives, specifically credit default swaps (CDS), for the naked shorting of government bonds which are denominated in euros. This means that Europe’s largest economy and the Frankfurt financial center – the biggest in continental Europe – will be off limits for speculators using these toxic CDS, which are issued by entities which have not fulfilled the legal requirements for underwriting insurance. This website has repeatedly urged a ban on credit default swaps.”

      It seems to me that Sherry is disparaging me, and not respecting a modicum of intellectual debate.

      But having just listened to Glenn Beck and hours of his lies, I am in no compromising mood. I have long studied the Nazis, and I know their propaganda tricks. Character assassination and the technique of the big lie are central.

      Patrice Ayme

      Like

  4. Patrice Ayme Says:

    Oh, it just dawned on me that some readers may be unaware that Credit Default Swaps (CDSs) are a form of derivative. They are. The 180 billion lost by American taxpayers with AIG, just an example. AIG is not even a bank, but an insurance company. 13 billion of the taxpayer money went back to Goldman Sachs, an accomplice of AIG, in setting up that system, constituting its entire “profit” for the year. Thank you, taxpayers! Goldman Sachs cash register rings for you.

    Also Germany outlawed naked short selling of financial stocks, another financial gimmick to rob the world of capital so as to fill-up the pockets of the few and unworthy, for useless pursuits, but the thrill of evil enjoyed.

    I guess me and the Germans do not know what we are talking about.
    Patrice Ayme

    Like

  5. jay gee Says:

    I wonder where Sherry’s money comes from. I wonder if she has ever been engaged in producing a tangible good or providing a non-FIRE, non-gaming industry service, sweat of the brow kind of thing or is she just used to spending others’ money. I would like to know Sherry IYO, When is a so called investment really just placing a gambling bet? At what point does an interest percentage constitute usury and when, do you think, will financial “growth” strangle a finite resourced world?

    jay gee

    Like

  6. JMG Says:

    What I can say is: Obama’s presidency is lurching like a drunk from one major catastrophe to the next, unable to accomplish more than simple triage when major surgery is needed.
    JMG

    Like

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