$ 1.14 trillion in derivatives: what it means for gold
Quadrillion? That’s a number only astronomers use, right? You know … how the North Star is “only” a couple of billion miles away?
But, which is quite disturbing, Earth economists are starting to use the number as well. No, not to discuss how many dollars there are (although I could feel as if the Fed just injected a trillion dollars into the economy). The Bank for International Settlements recently reported that the amount of derivatives outstanding has now reached the $ 1.14 trillion mark ($ 548 trillion in listed credit derivatives plus $ 596 trillion in [or face value] OTC derivatives).
Whether you are an astronomer or an economist, that is a tremendously large number. In case you need a mega-number refresher course, millions are followed by billions, followed by billions, followed by quadrillions (and, okay, quintillions and sextillions follow that). If it’s necessary a thousand trillion to make a quadrillionAnd sadly, that’s where we now find all this spin-off mess.
Take advantage of the madness
Derivatives, as you may already know, are essentially high-risk, unregulated credits. bets. Unlike the serious farmer who might employ a futures contract to hedge the price of the grains he has worked so hard to farm, many banking institutions now use futures, forwards, options, swaps, swaps, caps, collars, and floors, all the crazy inventory of prying devices to bet hell on pretty much anything.
What drives derivatives, to their roots (if you can somehow go back that far), are core assets that are leveraged to an insane degree. Martin Mayer, writing for the Brookings Institute, said that “the recipient of the payments on these loans or securities has purchased the securities for the duration of the exchange. with a 95% margin, despite the fact that the law says that no one can buy securities without raising half the price. “
Extrapolated, $ 1.14 trillion in assets “owned” with a 95% margin has to be one of the scariest phenomena in economic history.
The mathematicians and academics are supposedly the air traffic controllers of the spin-off complex, keeping everything carefully protected, up-to-date and safe. But more than a trillion of these highly leveraged investments is like multiplying America’s fleet of aircraft by a million …without bothering to increase the number of air traffic controllers. The potential for financial disaster here is simply overwhelming.
“Financial weapons of mass destruction”
So Warren Buffet warned about derivatives six years ago.
“We see them as time bombs, both for the parties dealing with them and for the economic system., “is how the Oracle of Omaha put it.
That time bomb nearly exploded in March 2008 with the Bear Stearns debacle. The title of an article by leading analyst Ambrose Evans-Prichard, “Fed Bailout Stopped a Chernobyl Bypass,” says pretty much everything you need to know.
According to the article, Bear Stearns had a staggering $ 13.4 trillion in derivatives, which is “greater than the national income of the United States.” So where did all those derivatives go? Well this time anyway, JP Morgan was encouraged to step in to add Bear’s derivatives to its own $ 77 trillion portfolio, giving the financial giant a grand total of $ 90 trillion in these shaky investments.
Which begs the question, why don’t we let Bear Stearns, $ 13 trillion in derivatives and all go bust? Wouldn’t that have taught the nation a valuable lesson and given Wall Street a well-deserved wake-up call for a long time to come? “Twenty years ago, the Fed would have let Bear Stearns fail,” said credit specialist William Sels. “Now it is too interconnected to fail.”
Which means a Bear Stearns collapse today could be the first domino to fall into a collapse domino setup tomorrow. Derivatives are really all interrelated. So expect the Fed to move with SWAT-like speed to bail out any banks struggling with their derivatives load.
But what happens when even that is not enough?
Survive the Coming Derivatives Crash
In the end, surprisingly, something will go wrong. Some bank will fail, some mathematician will miscalculate, or the Fed just won’t react fast enough next time, and the entire $ 1.4 trillion derivative complex will just “go away Chernobyl.” Only by then it might not be $ 1.4 trillion. It could be so much more.
What would the consequences be?
Whatever happens, it wouldn’t be pretty. Referring to the Bear Stearns emergency, James Melcher, a well-known hedge fund manager, said: “There was a risk of a total collapse early last week. I don’t think most people have any idea how bad it is. is this string could have been. “
The New York Times was even sharper: “If the Fed had not acted this morning and Bear (Stearns) failed to meet its obligations, then that could have triggered a widespread panic and potentially a collapse of the financial system.”
Yes … the Times said that.
But there is too much influence, too much money, too much greed and too much mischief involved here to believe that this story will have a happy ending. So as soon as you can, you really need to buy some “derivatives collapse insurance.”
You need to buy gold.
Think of gold, this beautiful, gleaming precious metal, as your own monetary system, an honorable investment divorced from the ancient network of paper money that has spawned so many nasty derivative beasts. If the worst were to happen, gold would represent the only financial sanity there is; Investors not ripped apart by a derivative crash would flock to the precious metal if only to wait.
If you just rolled your eyes, Google Bear Stearns to see how close we all got. Then go ahead and take a look at gold … before we start wondering how much is a trillion dollars worth of derivatives.