An article by Bruce Johnson at the American Thinker, “Are All Securities Created Equal?, questions whether the bundling of securities and derivatives is really “capitalism”. His contention is that bundled derivative products are too many steps removed from where wealth creation takes place and critics should not blame “capitalism” for what happens.
I responsed with the following comment:
An honest market where derivatives are sold is good for capitalism, because it creates a bridge between those who have capital (savers and investors) and those who need it (businesses). Stocks are derivatives: they are certificates of paper that represents parts of companies. I sell stock options. These are derivatives of stocks whose trade is based on an underlying stock position. Options provide an opportunity for market participants to reduce their risk–by selling positions, I take on the risk of others at a premium.
The problem with the mortgage CDOs is that they were packaged liar-loans that the lenders who made them knew the borrowers could never pay back, and so they bundled them and sold them in order to avoid their own bankruptcy. This is a sign of systemic corruption in the US mortgage industry: banks, brokers, borrowers, and bureaucracies are all corrupt.
The current United States form of capitalism is on its last legs, as the Federal Reserve kicks the can down the road of the greatest derivative fraud of all time: the US dollar. It used to be a derivative of gold, then it became a derivative of the “full faith and credit of the United States”. Since that isn’t worth bucket of warm spit anymore, the dollar itself is a fraud.
I have a saying every time one of my many purchases from China stops working: The Chinese pretend to give us products that work, and we pretend to give them money that’s worth something.
The Righteous Investor 
Yeah and the weak dollar just makes the extraterritoral tax bill for the compliant US person abroad even bigger by pushing them into higher tax bracket.
I lived in Switzerland. The cost of living is much higher than it would have been in the United States. My fake US dollars didn’t go very far over there. That was 1994 when I left. Many expats have suffered from this problem of US dollar devaluation. That is my main reason for renouncing my citizenship, because I wished to avoid going over the 2 million dollar limit in puny US dollars. The Canadian dollar has improved from a low of 1.63 to US dollar to parity. That means my little house, which was once worth about US 140K is now worth US 450K in just a matter of 14 years. If I wait until my when my house is worth a billion US dollars before selling, the US would expect me to pay 20% capital gains on the sale of everything over the exemption of 250K. Too bad, US. I renounced my citizenship and you get nothing. Ha ha ha.
A stock is not a derivative. A stock option is.
US government has enormous credit worthiness. The US collects a toll from every US citizen and business in the form of taxation. If you capitalized that toll charge, packaged it, the US government could sell a security that would be worth a multiple of the entire economy. It doesn’t matter if they collect that toll in goats, bubble gum or dollars. It’s a measure of the productive capacity of the country ($15 trillion annually). The US can and will make good on their debts. Why do you think the entire world will lend to them for 10 years at 1.54%? Perhaps your the one who’s out to lunch.
Webster’s defines “derivative” as:
Merriam-Webster’s Collegiate Dictionary., Eleventh ed. (Springfield, MA: Merriam-Webster, Inc., 2003).
Now please note that a stock certificate that has value because it represents an underlying asset, a fraction of a company. It is not the company itself. It represents a fraction of the company. So it is by definition a derivative. A stock option is also a derivative: it has also an underlying security, the stock in the company for which it is a derivative. This makes an option a derivative of a derivative.
The United States is insolvent. It continues to borrow in order to meet its obligations, and will eventually destroy the value of the derivative called the “dollar”.
By the way, the Federal Reserve is monetizing huge amounts of the debt of the United States precisely because it is difficult to find sufficient buyers for the debt.
By the way, all fiat currencies in history until today, eventually become worth their intrinsic value.
The 100,000,000,000,000 dollar Zim-dollar however is worth US $5 as a sovenir that tourists buy. Thus, you can buy a zero worth 100 trillion zimdollar with $5 dollars worth of US money: both have an intrinsic value of zero: a=b and b=c, then c=a. Basic logic my friend.
Well said Petros. Well defended. As for the “dumb” guy feeling that “US government has enormous credit worthiness”, he “was” correct about 50 years ago, I guess he will find out soon enough how naive he might be today. I could be wrong.