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The New Great Depression and how to preserve your savings...

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  • Everyone carries a part of society on his shoulders, no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards destruction. Therefore everyone, in his own interest, must thrust himself vigorously into the intellectual battle.

    Ludwig von Mises

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Derivatives

What's a derivative?

Derivatives are "derived" from underlying assets (homes, debt, etc). A lot of smart people have tried to explain what these things are, but miss the forest for the trees. A derivative is NOT an asset. It's, in reality, nothing, just an imaginary security of no value that banks trade as a kind of "gentleman's bet" on the value of future risk or securities.

Let's say you and I want to bet on whether our neighbor Joe will default on his mortgage. Is the bet an asset? Does it have any real value? Both counts register a definite "no."

That's the equivalent of a derivative.

It is total and complete lunacy to claim these items are anything more than fiction (perpetuated by another fiction: that Wall Street is able to value these things or price them accurately). But thanks to Wall Street's lobbying power, they've become the centerpiece of the financial markets.

The notional value of the derivative market is roughly $1.4 QUADRILLION.

I realize that number sounds like something out of Looney tunes, so I'll try to put it into perspective.

$1.4 Quadrillion is roughly:

  • 40 TIMES THE WORLD'S STOCK MARKET.
  • 10 TIMES the value of EVERY STOCK AND EVERY BOND ON THE PLANET.
  • 23 TIMES WORLD GDP.

As early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives. She said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation that the market would implode.


The most liberal estimate of the bailout costs ($24 trillion) is equal to less than 2% of the derivatives market and very dangerous is that the vast bulk of them (84%) are based on interest rates:

[this is why 'they' will sell their mother and father to keep the interest rates LOW and why by doing this 'they' will create a hyperinflation which in turn will push up the interest rates and destroy the financial system]

In 2008 the Credit Default Swap (CDS) market (which is only 1/10th the size of the interest rate-based derivative market) nearly destroyed the entire financial system. One can only imagine what would happen if the interest rate-based derivative market (which is ten times as large) suffered a similar Crisis.

The vast majority of derivative exposure involves only a small handful of institutions: JP Morgan, Goldman Sachs, Bank of America, Citibank, and HSBC.  JP Morgan is holding double the amount Goldman and Bank of America are holding. [An intelligent saver will for obvious reasons stay away from these financial institutions.]. If 4% of derivatives are "at risk" and 10% of those bets go bad, you've wiped out ALL OF THESE BANKS' EQUITY and they go to ZERO.


We have unfortunately not seen the end of the cumulative credit losses. OTC derivative problems are not going away. Rather than being under control, the problems have just started!

 

The biggest danger yet to come are  $ 62 trillion Credit Swaps....!

The BIS (Bank of International Settlements) announced the biggest gain in derivatives ever since 1930. The total is approximately $ 1,144 Quadrillion. Notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. The OTC derivative house cannot be allowed to go broke. This means that whatever funds are required to rescue failing international investment banks, banks and financial entities will be provided. Bearing in mind that monetary inflation precedes price inflation, there is little doubt we are about to see Hyperinflation...click here for more

After the crash of 1920, the legislators issued laws (Glass Steagel) forbidding banks to speculate on the Stock and Money markets. Ever since they have found a way around this. As a result, what we see today has become a lot WORSE.

 


Compared to the Credit Swaps, the Subprime looks like a walk in the park?

 

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