American Gamblers

Heard of he phrase, "put your money where your mouth is?" Well, if you're an American investor, you probably live by that phrase and are eating it right about now.

For some time the American economy has moved away from the production of goods and entered into the services industry. The end of the industrial revolution happened sometime shortly after WWII as the United States began to expand its global reach, providing other countries, such as Japan and Germany with the resources necessary to compete with our companies here at home. We did this through the Monroe Doctrine in Europe and under the reconstruction efforts of General Douglas McArthur in Asia.

By the 70s, it was becoming a hard pill for many Americans to swallow. And we are still in the process of losing our manufacturing base to foreign competitors, most notably China and southern Asia now.

Hard pill? Quite. The US has enjoyed being the primary manufacturing hub of the world since shortly after the American Revolution. Our continued innovation and subsequent manufacturing of these inventions, have provided this country with the ability to become the strongest nation on earth.

Interestingly, almost all finished goods prior to the Revolution were produced in England and then re-sold to consumers all across the world. Take clothes made from cotton as an example. American farmers would grow and then sell the cotton to manufacturing companies in England who would then make clothing items and, in turn, transport them back overseas to be sold as a final product. This was the case for almost every conceivable product, including tea.

As for the English, this system worked wonders for their economy until its colonies wanted to produce their own goods without having to bear the additional cost of shipping, or pay "unfair taxes" on these goods. The British knew a good thing when they had it and tried very hard to hold on to the advantage as long as possible.

However, after WWII the United States willingly gave several nations, (formally our enemies) the ability to directly compete with its own companies at home by building up their manufacturing bases even better than they were before. Often even better than our own.

Fortunately, the resourcefulness of Americans would lead to the growth of the services industry which quickly began to prosper in conjunction with the technological revolution. Again, the United States had a great deal of opportunity to prosper economically, and dominate, for a very long period of time.

However, we are currently struggling to remain competitive with other industrialized countries in the innovation of new technology, and we have long ago given them the reins of production. Those latest iPods that enter the market right before Christmas every year, are made in China. From the development of the iPhone, it has taken all of one year for an Asian company to develop and market a competitive product, which sells for a third of the price.

The services industry has followed the same path as manufacturing has, repeating pretty much the same mistakes. In order to remain competitive, American companies have decided to provide most its services off-shore. Because of the governments unwillingness to regulate how business do their business, this trend has continued unabated for almost two decades now. The result of which has provided for the emergence of several other countries as players in the world market.

Then in the late 90s, a new type of economy began to bloom here in the US and it was called the derivatives market.

Lets take a quick step back and glimpse a shortened snapshot of the history of the American economy.

First, we provided raw materials for others to produce, selling vast quantities to other countries and then buying the finished product later. Then we quickly became the world leader in manufacturing, but after about two hundred years of (mostly) unabated prosperity, we decided to provide other countries with the ability to directly compete with us. While this was happening, we painfully transformed our economy from production of goods to the servicing of these goods. Not too long afterwords, we decided to save a little money and sacrifice quality to save a buck here and there shipping the bulk of the service industry overseas. Now, the bulk of our capital is used to speculate on those very goods and services we used to own themselves.

In essence, we are now a country of gamblers. No matter how you look at it, the derivatives market is nothing other than sheer speculation with no guaranteed outcome. That is why anyone who is smart gets insurance on it, or doesn't play the game at all.

According to the richest man in the world, Warren Buffet has talked about the derivatives market using the terms, "ticking time-bomb","A fool's game", and "weapon of mass destruction."

Now, derivatives are nothing like stocks traded on Wall Street. They are very different things all together mainly because the vast majority of derivatives are traded outside of the market and are not held on a company's "audited" balance sheets. They also have really nothing to do with anything other than the concept of risk.

Stock is ownership in something. A derivative is really nothing other than "absence of risk" in something like a stock, or really anything you would normally put your money in. The upside is that the potential returns are generally faster and often larger.

Now why would I include this singular type of trading into the overall picture of our entire economy and equate it with our real economy? Simple. Because since 2003, the derivatives market has been larger than our combined global monetary wealth.

That's right, we (the entire global community) are no sitting on basically nothing other than sheer speculation which is now estimated at over 500 trillion dollars. In essence, Wall Street has become the new Las Vegas, but have put up our hard-earned money and savings as collateral.

What's worse is that they have continued to hide their devious accounting from the federal government, and lied to us about the true nature of the risks involved. Of course, none of this would have been allowed to occur if it hadn't been for the fed to give its OK, and it did this under the leadership of Alan Greenspan who now tells us we are about to head right off the cliff and into possibly another Great Depression.

How nice.

Also, unlike stocks which will last indefinitely-until sold to another buyer, or the company itself is sold, (or goes belly up), all derivatives have an expiration date associated with them.

This is why banks and investment firms, among others, have needed access to cash quickly or risk total collapse. This money is being used to pay off its bad bets in the derivatives market.

Now derivatives are not really sold in a market like Wall Street so to speak. By the derivatives market I mean to say whenever there is a buyer and a seller brought together to create a market.

Because there is no real regulation of derivatives, any seller of a derivative can find their own buyer willing to risk a future outcome. And this is why banks are swallowing up investment firms. Investment firms have basically purchased bad derivatives from banks who cannot pay them back for these loses when they are due. If these banks did not take them into their fold, then they in turn would be held to pay for these bets gone wrong, and as a result, probably go belly up themselves. That would be a really, really bad thing because our money is in those banks.

So, while investors have for years been telling the public that the best strategy for the American consumer is to take a long-term conservative approach to investing our money, they have essentially ignored their own advice and played craps with our hard-earned money we give them in good faith.

This while certain politicians have told us to quit "whining" about the economy and then gone ahead and decided to use taxpayer money to bail out these very same banks and investment firms who put us all here in the first place.

Make no mistake about it, until the derivatives market is brought under tight regulatory control, which I doubt it ever will be. The American consumer will continue to be mislead by the very people we are supposed to be putting out trust in.

But again, this shouldn't really be news to you.