Massive rant ahoy...

The current financial issues are more complicated than what is currently being portrayed in the wider media. There are a number of other issues that are of concern or at least as concerning in the build up to the current collapse.

I don't want to down play the role of CDOs and similar instruments and the impact that they have had on the world economy. Created in 1987, they were pushed by the credit rating agencies who saw these as a business development opportunity that gave them the chance to rate the new instruments each time they were created. A new instrument was created by taking the original loans that were already poorly rated and mixing them with well rated loans. The creators were then able to make the risk magically disappear when the CRAs re-rate the new product. The banks got to off-load their bad loans and the CRAs made money issuing a new rating on the new mixed product. What could possibly go wrong?

Several other things were also happening in the market that are fairly unique to our times. Electronic trading has brought occult trading techniques such as margin lending, short selling, commodity trading and CFDs to Ma & Pa investors. It has also linked markets in completely new ways and has even created new so called Dark Markets where vast amounts of electronic money is made, lost and traded without scrutiny or regulation.

Another outcome of trading-at-the-speed-of-light has been the vast amounts of money that has been gambled on food futures. Our ABC's Background Briefing's broadcast on this very topic for the best explaination. In short the cost of all commodities are being pushed up by traders gambling on the price of these commodities in the future. Food has become expensive due to a combination of the emergence of a massive cashed-up middle class in places like China & India, the unregulated gambling of traders and to a much smaller degree the global climate.

Also of great concern is the massive amount of assets held by Sovereign Wealth Funds. Again, BB is to the rescue in explaining this thoroughly.

Consider for a moment that China's Foreign Exchange cash reserves in March 2008 reached USD$1.68 Trillion—approximately 70% of which is in US dollars. That's not everything they have, its just the money from other countries that they have sitting around.

This is interesting for a number reasons:

that this money isn't sitting around under a really big mattress, its being actively managed in foreign markets;
any portion of that money can make or break a market;
it would take the Australian economy 2.4 years just to make that same amount of money (our 2007 GDP was roughly USD$700 million);
the US federal reserve only has USD$780 million cash in circulation as of September 2008;
and finally, if you add up all of the USD in circulation, in travellers cheques and tied up in domestic financial institutions like banks, you only get $1.4 trillion. Lets hope that China doesn't cash their traveller's cheque just yet...

All in all, our economies are now massively interconnected and co-dependent. Traditionally strong economies have been crippled by the greed and short-sightedness of a few and have become incredibly vulnerable. Merchant traders have become incredibly rich mostly because their high value clients, the cashed up countries like China and the oil producing nations, have become even more rich and powerful.

The traders have reacted to a shortage of places to invest money and have created new markets and products. These products were often not well crafted and many have collapsed, taking with them the economies which the merchant bankers operated from, namely USA and the UK.

The rich countries have lost a little bit of money, but are probably still well up. The smart rich countries are buying up everything that they can while it is all so cheap. While all of that is happening, the global demand for food as well as the intense desire of the traders to recoup their losses has caused an increase in commodity prices.