http://theeconomiccollaps(...)rld-financial-systemThe Horrific Derivatives Bubble That Could One Day Destroy
The Entire World Financial SystemToday there is a horrific derivatives bubble that threatens to destroy not only
the U.S. economy but the entire world financial system as well, but unfortunately
the vast majority of people do not understand it. When you say the word 'derivatives'
to most Americans, they have no idea what you are talking about. In fact, even most
members of the U.S. Congress don't really seem to understand them. But you don't
have to get into all the technicalities to understand the bigger picture. Basically,
derivatives are financial instruments whose value depends upon or is derived from
the price of something else. A derivative has no underlying value of its own. It is
essentially a side bet. Originally, derivatives were mostly used to hedge risk and to
offset the possibility of taking losses. But today it has gone way, way beyond that.
Today the world financial system has become a gigantic casino where insanely large
bets are made on anything and everything that you can possibly imagine.
The derivatives market is almost entirely unregulated and in recent years it has
ballooned to such enormous proportions that it is almost hard to believe. Today, the
worldwide derivatives market is approximately 20 times the size of the entire global
economy.
Because derivatives are so unregulated, nobody knows for certain exactly what the
total value of all the derivatives worldwide is, but low estimates put it around 600
trillion dollars and high estimates put it at around 1.5 quadrillion dollars.
Do you know how large one quadrillion is?
Counting at one dollar per second, it would take 32 million years to count to
one quadrillion.
If you want to attempt it, you might want to get started right now.
To put that in perspective, the gross domestic product of the United States is only
about 14 trillion dollars.
In fact, the total market cap of all major global stock markets is only about
30 trillion dollars.
So when you are talking about 1.5 quadrillion dollars, you are talking about an
amount of money that is almost inconceivable.
So what is going to happen when this insanely large derivatives bubble pops?
Well, the truth is that the danger that we face from derivatives is so great that
Warren Buffet has called them "financial weapons of mass destruction".
Unfortunately, he is not exaggerating.
It would be hard to understate the financial devastation that we could potentially
be facing.
A number of years back, French President Jacques Chirac referred to derivatives
as "financial AIDS".
The reality is that when this bubble pops there won't be enough money in the entire
world to fix it.
But ignorance is bliss, and most people simply do not understand these complex
financial instruments enough to be worried about them.
Unfortunately, just because most of us do not understand the danger does not mean
that the danger has been eliminated.
In a recent column, Dr. Jerome Corsi of WorldNetDaily noted that even many
institutional investors have gotten sucked into investing in derivatives without
even understanding the incredible risk they were facing....
A key problem with derivatives is that in the attempt to reduce costs or prevent
losses, institutional investors typically accepted complex risks that carried little-
understood liabilities widely disproportionate to any potential savings the derivatives
contract may have initially obtained.
The hedge-fund and derivatives markets are so highly complex and technical that
even many top economists and investment-banking professionals don't fully
understand them.
Moreover, both the hedge-fund and the derivatives markets are almost totally
unregulated, either by the U.S. government or by any other government worldwide.
Most Americans don't realize it, but derivatives played a major role in the financial
crisis of 2007 and 2008.
Do you remember how AIG was constantly in the news for a while there?
Well, they weren't in financial trouble because they had written a bunch of bad
insurance policies.
What had happened is that a subsidiary of AIG had lost more than $18 billion on
Credit Default Swaps (derivatives) it had written, and additional losses from
derivatives were on the way which could have caused the complete collapse of
the insurance giant.
So the U.S. government stepped in and bailed them out - all at U.S. taxpayer
expense of course.
But the AIG incident was actually quite small compared to what could be coming.
The derivatives market has become so monolithic that even a relatively minor
imbalance in the global economy could set off a chain reaction that would have
devastating consequences.
In his recent article on derivatives, Webster Tarpley described the central role that
derivatives now play in our financial system....
Far from being some arcane or marginal activity, financial derivatives have come to
represent the principal business of the financier oligarchy in Wall Street, the City of
London, Frankfurt, and other money centers. A concerted effort has been made by
politicians and the news media to hide and camouflage the central role played by
derivative speculation in the economic disasters of recent years. Journalists and
public relations types have done everything possible to avoid even mentioning
derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most
notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka
the monstrous $800 billion bailout of Wall Street speculators which was enacted in
October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin,
and the Obama Democrats.
But wasn't the financial reform law that Congress just passed supposed to fix all this?
Well, the truth is that you simply cannot "fix" a 1.5 quadrillion dollar problem, but yes,
the financial reform law was supposed to put some new restrictions on derivatives.
And initially, there were some somewhat significant reforms contained in the bill.
But after the vast horde of Wall Street lobbyists in Washington got done doing their
thing, the derivatives reforms were almost completely and totally neutered.
So the rampant casino gambling continues and everybody on Wall Street is happy.
For now.
One day some event will happen which will cause a sudden shift in world financial
markets and trillions of dollars of losses in derivatives will create a tsunami that will
bring the entire house of cards down.
All of the money in the world will not be enough to bail out the financial system when
that day arrives.
The truth is that we should have never allowed world financial markets to become a
giant casino.
But we did.
Soon enough we will all pay the price, and when that disastrous day comes, most
Americans will still not understand what is happening.