[p2p-research] 1.5 quadrillion derivates bubble

[Michel Bauwens]

via
http://theeconomiccollapseblog.com/archives/the-horrific-derivatives-bubble-that-could-one-day-destroy-the-entire-world-financial-system


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"*<http://news.bbc.co.uk/2/hi/2817995.stm>
.

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"*<http://tarpley.net/2010/04/25/fight-the-derivatives-cancer-with-a-wall-street-sales-tax-plus-bans-on-hedge-funds-credit-default-swaps-and-synthetic-cdos/>
.

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*<http://www.wnd.com/index.php?fa=PAGE.view&pageId=143057>
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*<http://tarpley.net/2010/04/25/fight-the-derivatives-cancer-with-a-wall-street-sales-tax-plus-bans-on-hedge-funds-credit-default-swaps-and-synthetic-cdos/>
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.

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