Saturday, August 14, 2010

The Detonation Has Yet To Occur

People laboring under the mistaken assumption that this is the worst of it now are living in a dreamworld.

The entire planet has been Bernie Madoff'ed. The operating capital of most of the world's private enterprise is tied up in derivatives.

Just as shortfalls caused American investors to draw on the "fund" Madoff was "managing" for them, revealing the magnitude of his scam, the shortfalls now in national budgets are causing the very wealthy to draw on "derivatives" to get some real cash in hand instead of words on a piece of paper. Worldwide, investors are inquiring if they can "cash in" some "derivatives" profits.

There is nothing there to cash in.

Whereas Madoff's ripoff was measured in billions of dollars, the "derivatives market" consists of quadrillions of dollars which exist on paper but otherwise exist nowhere else.

Imagine what is going to happen during the next six months when accounts are called on these funds. It is going to be apocalyptic, nothing less.


Anonymous said...

The derivatives market is NOT worth "600 trillion dollars".

Oh, for the love of god, I can not believe economic illiterates write this "Economic Collapse Blog".

Seriously? First of all, that's the value of the UNDERLYING ASSET, and not the actual trade made. For example, corn prices could be $300 a bushel, and you could pay a $0.50 per bushel price for buying it at $302 per bushel in the near future. The $302 per bushel is the value of the UNDERLYING ASSET. It's the aggregate of these values of underlying assets that come to $600 trillion. Actual money traded is just the sum of $0.50 per bushel, plus the margin of the $2 per bushel of profit you may make. You don't even transact in large sums; both sides submit deposits to clearing houses, and only get the difference of what they earned from buying and selling; they don't need to fork out millions.

The $600 trillion is just a notional figure of *about what* is being traded. As for *what* is traded, $500 billion is probably the actual value of annual trades that happen every year. And only in America. And only in the over the counter market, not the exchange traded one. The actual derivatives market is a very tiny portion of the financial sector, and only 200 or so financial institutions in United States trade in them. Take the world, and it's even smaller.

Texas Arcane, just pick up a proper book on options, futures, and derivatives, and you'll understand them. It will keep you immune from petty mass media and blogger alarmism, that comes from financial illiterates.

Texas Arcane said...

... except you left out the part where the majority of all investment capital in the United States is "sitting" in funds which are themselves based on derivatives earnings, in many cases where the actual capital on hand is "fractional reserve banking" which means the money supposedly invested in the derivatives is itself loaned out to other people who are themselves invested in derivatives.

600 Trillion dollars is a modest figure. More than that claimed on balance sheets alone.

The author of the article is not an economic illiterate. He's a person who understand economics outside of what they put on Fox News.

Anonymous said...

This impending economic apocalypse is the elephant in the room and someone has strapped dynamite to it.

It'll be messy when this one bursts.

Anonymous said...


"Anonymous" just misses the point that derivatives are Tertiary Entities, based on Ephemera. They are a Con Job, and when Reality hits ... which BTW has hard left walls and hard floors ... and confidence gets bitchslapped by actual dynamics, the "markets" are gonna be worth shit. As for the statement that derivatives are a tiny portion of the "financial sector" ..... I'll talk slower. Their "on-paper" profitability makes them candy to hotshot traders who deal in Epemera.

Minerals, water, arable land ?
Primary Assets

Gold, potable water system, grain ?
Secondary Assets

Bonds, stocks, Derivative Shit
TERTIARY ... BS ..... useless

Perhaps a monetary asset, but not wealth. An Alpha Strategy would be one focused on tangible good, either primary or Secondary Assets.

We know the PRC is made of fools, dont we "Anonymous" ? They've been shedding useless tertiaries, and overtly shunning them. Instead, they've been buying copper by the warehouse, uranium ore in quantities that have doubled world pricing, ramping up their production of key VLSIC sets and so on.

The Market for Mass Delusion [ derivatives ] may in fact be LARGER, in thre quadrillions.

When monetary assets/tertiaries are ultimately revealed as worth nothing, Tangibles and Reality and Actual Skills will again ascend as they rightfully should. banking will die. Credit clearing networks will dominate. And they will not find any use for paper based on promises.

Fund managers ? Notsomuch.

I'd pay attention to the fundamentals behind the movie screen; it will keep anyone immune from petit mass media MOUTHPIECES, and polysyllabic BS that comes from financial "literates" such as you

Coppische ?


Anonymous said...

A second "love-you" to Anonymous #1, King of Derivative Literacy

Everything the "Literates" do has turned to shit. But keep on listening to them. Beatings will continue til morale Improves ! Thanks for your agitprop ... but back here in the Real World, we see continued SURPRISE by self-anointed Experts. Their surprise in directly related to their cognitive unencumbrance.

excerpted from ...

“Surprisingly” Bad Economic News

Have you noticed how often the elitist “economists” in government, academia and the media are surprised by bad economic news?
They are constantly “surprised” by high unemployment numbers. They say the low manufacturing numbers were “unexpected.” They claim they didn’t “foresee” such a great trade imbalance.
When the Fed Open Market Committee met in June it said the economic recovery was “proceeding” and was likely to advance at a moderate pace. At the time they were talking of “tightening” monetary policy to fend off inflation.
Vice President Joe Biden has said we are in the “Summer of Recovery.” President Barack Obama has been saying his policies have “pulled us back from the brink of another Great Depression.” As recently as Aug. 2, Treasury Secretary Timothy Geithner, in an op-ed piece for The New York Times, wrote an uplifting column entitled “Welcome to the Recovery.” And he wasn’t being facetious.
He wrote that exports are booming, private job growth has returned, businesses now have strong balance sheets. But then he mentions his surprise.
“The new data show that this recession was even deeper than previously estimated,” Geithner wrote.
Still, he says, all economic measures represent an encouraging turnaround. He must have forgotten to tell that to the Fed.
Because the Fed’s had an “oops” moment. It has decided inflation isn’t an immediate threat after all, and they are “loosening” monetary policy again to try and stave off deflation and a second recession. But with the interest rate at zero there is little left to do.
Fed Chairman Ben Bernanke signals he fears a double-dip recession. The Fed decides it’s going to buy back debt. Buy back debt?
Fiat currency is debt. So the Fed is buying debt with debt. It’s shuffling money piles around. It’s taking money from one pocket and putting it in another. Meanwhile, the International Monetary Fund declares the United States is essentially bankrupt, writes Laurence Kotlikoff of Bloomberg News.

OhioDude, Reality-Based Troglydyte

Dr. Richard said...

Anonymous described how exchange traded future work. The problem is not exchange traded futures but certain OTC derivatives - particularly credit default swaps, interest rate swaps, currency derivatives, and exotics for which there are no margin requirements, no standardization of documents, and absolutely massive potential exposures if they blow up.

I have seen credible (derivatives industry) estimates of total exposures to derivatives being in the 1,000 trillion dollar range

This was an unstable mess in 1993-1995 when I worked in the space and warned about the risks. Likewise, I saw how the culture at Enron when I worked there in 1995 allowed insane risk taking and ignored risks. The culture at most hedge funds and major players like Goldman Sachs, JP Morgan, etc is no different from that at Enron. I left the industry 14 years ago because I saw where it was heading and didn't want to be in a no win situation where I worked in risk management, had responsibility (if things blew up), but did not have the authority to stop transactions or risk deals.

17 years later, the exposures and risks are 1000X greater.

The Economic Collapse Blog is not a bunch of economic illiterates. Anonymous is the economic illiterate and 99% of books on futures, options, and derivates do not cover the garbage that risks bringing down the entire system.

Anonymous said...

quote OhioDude

banking will die.

end quote

say it aint so, i can hardly taste my coffee for the salty tears falling into my mug.

banks are a place where lies are warehoused, assigned values and traded. it's the oldest scam around and it will continue until people awaken to it. the current collapse will serve no purpose at all if the money printers are still at the helm of a new currency.

it's not a nice thing to say but the dieoff better include everyone, if people can't begin to see the things that really matter, there's really not much point to evolution if we can allow ourselves to be enslaved by paper.

Anonymous said...

Banks as a place to deposit and withdraw money or to arrange loans and mortgages will always be around.

Money will also always be around. No one would want to go back to barter systems.

Anonymous said...

China knows when to cut off the dead wood, by the look of things: