The long reach of the conservation law

Derivative tradings are zero sum games. Wherever there are winners, there are losers. This is the conservation law. There are also high costs associated with tradings, fat salaries and bonuses. Overall, there are net losses for the whole derivative industry. Without the support of the regulators, derivative business will always be a boutique industry.

In 1998, LTCM failed. Without the help of the Federal Reserve, the collapse of LTCM will cause serious damage to its counterparties, which include most of the high finance. With a weakened finance industry, it would not be capable to general a global financial crisis ten years later. Instead, FED intervened. This encouraged the further increase of leverage of the financial industry. It sowed the seed of much larger financial crisis on the road.

In 2008, ten years later, Lehman Brothers, the fourth largest investment, collapsed. Within a week, Goldman Sachs and Morgan Stanley, the two largest investments, became commercial banks, becoming directly insured by the federal government. Merrill Lynch, the third largest investment bank, was acquired by Bank of America under the government prodding. AIG, the giant insurance company, was bailed out with two hundred billion federal fund. Without the help of the government, the investment banking industry and the global finance system would largely decimate, greatly reducing the yoke on the general public.

After 2008, the US stock market experienced the longest bull market in history. The authority claims that this justifies the government interventions during financial crisis. But from the iron law of conservation, without genuine economic growth, the bull market in the financial market must mean the bear market somewhere else. Indeed, the US fertility rate has dropped sharply to the lowest point ever recorded after 2008. Globally, the fertility rates of the highly financialized nations are capped far below the replacement rate. The gain of financial market is the loss of the biological market.

In 2020, due to large scale lock down related to global pandemic, economic activities tumbled. So did the stock market, which is supposed to reflect the market condition. However, governments worldwide began the largest money printing in history, boosting the stock market. From the conservation law, something has to give.  Sure enough, the money printing generated a huge inflation, amid an economic downturn when many people are very vulnerable.

The term, unintended consequence, is often used in the press. From the conservation law, unintended consequences are really the inevitable result of intended consequences.