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SPEAKING FREELY
Derivatives and free trade
By Zhuubaajie

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

HONG KONG - There is nothing to fear from the protectionist noises made by the US Congress. It is all bluff with no cards. Elites from both parties have long agreed (for at least 20 years) that free trade must be defended at all costs. It concerns the future of America.

Historically, free trade has served many prominent Americans well. "Free trade" was the justification that Warren Delano (and the Brits, of course) used to push opium on China, and to build

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the serious wad that eventually supported Franklin Delano Roosevelt's run for president.

Free trade is also how the American banks were/are going to take over the world. All who want to do business with America must open their markets to American style "banking", meaning trading derivatives.

Derivatives - Opium 2.0?
After the 2008 financial debacle, derivatives continued to grow in the United States, and America’s economy has not recovered. In America today, the derivatives cancer has now grown to over US$700 trillion (by June of 2011, according to Bloomberg), which is almost 50 times the United States gross domestic product.

On its face, derivatives are brilliant. As a postindustrial move, derivatives are not constrained by natural resources, not limited by labor, and restricted only by the salesmen’s ability to sell. Upside growth looks unlimited, as "derivatives trading" is based solely on the "ingenuity" of the new-fangled breed of financial engineers.

The salesmen do not even need to explain (and very often cannot) the convoluted "contracts". Instead they rely on the age old "trust me" confidence games. The number of "contracts" is not constrained by anything in the real world. As long as you can find new suckers (buyers), you are set to profit, so the belief goes.

Like opium, derivatives cost very little to "manufacture"; the profits are humongous, and it is hugely destructive. In the 1800s, Anglo Americans (Google "Delano" and "opium") forced opium on China, and in one generation or two caused China's economy to drop from being the world's No1 or 2, to below No 100.

Just like opium, this time around this new "drug" is also pushed as part of "free trade". Demands are made on all nations that want to do business that they must open their banking industry and relevant markets to the derivatives trade.

Except the difference this time is that it is done backwards. The opium trade was supposed to plague foreigners, and to be banned domestically. But the swashbuckling "traders" this time around are so greedy they have no qualms about profiting from the pain of their own brothers and sisters and even grandmothers - and they did. The derivatives drug is so potent, it took down the Anglo American societies and economies before they could kill the Chinese economy.

The cancer appears unstoppable. This month there is serious talk of American mutual funds adopting derivatives on a large scale, and the US Commodities Commission is setting rules to make trading derivatives more accessible to the small guys. The derivatives casino is going to be $1.5 quadrillion in no time.

All of the big banks in America (at least the ones with derivatives exposures, which is just about every one of them) could fail with or without warning, just as Lehman Brothers did, because their leverage (exposure vs equity) is often higher than 50 to 1. If you have an American bank as counterparty on just about any transaction, you can inadvertently be dragged in, even if your company does not touch derivatives.

The 2008 derivatives-caused debacle was only a first taste. National policy that allows sheer gambling involving all of the major financial houses of the nation, at a level 50 to 100 times GDP is sheer madness.

Derivatives and free trade
Why is it that the United States of America will not back away from free trade?

Hundred billion dollar trade deficits? Chicken feed. What's a few hundred billion dollars, especially when the profit margins are so low (China exports to America typically carry 3-5% margins), and America makes up for it in the huge profits it makes from operating overseas (in 2010 in and from China alone, American companies made over $100 billion in pure profits).

And then the derivatives profits were going to be pure gravy. Nobody - but nobody - knows "financial engineering" like Americans, and experience shows that in derivatives trades, American banks (collectively) almost always wins (as against the foreigners).

So as long as there is free trade, American banks can swoop in, and skim the cream off of the top from all central banks and large financial entities around the globe. As long as "free trade" keeps the doors open, the American banks were going to make trillions in profits. That's better than having to invade other nations militarily and collecting war reparations as in the imperialist days.

You really think there is any chance free trade will be killed?

2008 complicated things a bit. The world witnessed how even 100-year old financial houses can go belly-up overnight. Lehman Brothers had $60 billion of derivatives on its books, lost 3% or $2 billion, which wiped out its equity. What is the significance of that? Three percent of $700 trillion is $21 trillion, which is more than the total equity of all American financial companies. And you would never know when it would hit. So for the plan to work, foreigners must be convinced to open up their markets, in order to feed the meat grinder.

2008 complicated things, as I said. Both Germany and China ordered their banks to stop gambling in derivatives. Both of their economies recovered. America bet the farm, and counted on expanding the scope of the casino, betting heavily that (a) other countries will be forced to open their markets to this contagion, and (b) the American banks would win.

The $7.77 trillion in subsidies to the American banking industry also complicated things (Bloomberg expose last week after Freedom of Information Act requests). Now the foreigners are going to point to that as in violation of World Trade Organization rules. What other nation's banks can hope to compete against that level of subsidy? $7.77 trillion is more than all of China's subsidies for all industries over the last 5,000 years.

"Free trade" for banking is counted on by Washington to be a grand "double or nothing". So Washington cannot afford to push protectionist trade. Is it going to be double or nothing? What do you think?

Zhuubaajie is a pen name of a businessman operating out of Hong Kong, who travels often to the United States.

(Copyright 2011 Zhuubaajie)

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing. Articles submitted for this section allow our readers to express their opinions and do not necessarily meet the same editorial standards of Asia Times Online's regular contributors.