I've been captivated by the whole global economic meltdown for a multitude of reasons. First, because I am an avid news watcher and for the last year it's been the second most covered story--the first most covered story being the second coming of the Messiah. Second, because the economic meltdown has rendered the Frozen Wastelandees Zloty (FWZ, or more commonly known as PLN) virtually useless. In case you were wondering, 1 FWZ went down from 50 Dollar cents to almost 25 cents in a span of 6 months. So, yeah, it's cheaper to burn heaps of FWZ than pay for heating.
Back to the to economic meltdown, last April I wrote this piece about how it seems that there are no winners in this economic meltdown. Today, I had a eureka-moment. I am no economist, but follow me on this one. With this economic meltdown, all governments are "bailing out" their banks and companies. Initially, I understood a bail out as throwing free cash at a bank or a company, in order to save the economy from total collapse. Turns out, this is not the case. For example, when a bank is bailed out, what the government is doing is basically giving the bank cash in exchange for stocks (i.e. ownership) of the bank. That's why there's all this buzz about socialism and nationalisation and all that. So the government passes tax payers' money to a bank, in exchange for the bank's stocks. Mind you that this transaction is happening at a time when the stock of any bank or corporation is trading way below its average because of the economic meltdown.
Let's take a recent example here, the Royal Bank of Scotland (RBS) reported the biggest loss in British corporate history and right away the UK government announced plans to back it up. I am not aware of the exact details, but I assume the deal will include the UK government pumping cash into RBS to enable it to continue lending in exchange for shares. Now, as you can see from the chart below, RBS's share is now trading at 23p. Just 6 months ago the share price was around 700p. So assuming the government ends up getting an extra 20% stake in RBS and in two years time we're out of this economic meltdown and the share is back to, say, 500p, that would be a pretty sweet deal for the government, right? It's the same concept that investors use when they buy stocks when the market is down to profit when the market bounces back.
What's really deliciously evil here is that given proper planning and the abundance of Machiavellianism, governments can engineer an economic meltdown. I can see it now, the G8 leaders bathing in a pool of undervalued corporate stocks in a secluded castle in Bavaria. Well played.