The Size of Derivatives Bubble = $190K Per Person on Planet

Very interesting numbers. Good article. I read that they have to build a new debt clock because it doesnt have enough digits anymore. Here is the article http://www.gotoguy.com/?p=458

1. If one quadrillion takes 32 million years to count - stop counting it. The solution is not in figuring how big it is and how it got there. Simple. How did George W. Bush get people to believe in WMD? - Lies based on fear. How did we get to one Qn of derivatives ? - Lies based on greed.

2. Look at it this way. Derivatives are like the foilage on a tree. One giant Oak produces millions of leaves. When these leaves get diseased, the disease will eventually find its way to the roots and kill it. Unlike the natural aging of a tree when the root system gets weak and cannot support the foilage and diseases manifest, derivatives are diseases planted on top of otherwise healthy trees.

Remember - An aged tree that has reached its natural life span must be left to die naturally or be cut down to prevent its collapse and inflicting damage. A little sorting need be done.

To save an otherwise healthy but diseased tree normally requires 2 steps.

1. Cut away the diseased foilage - let the derivatives die. Some people/institutions (the most greedy ones) will suffer. Much as you may fear, most of the time, this will not kill a basically healthy tree.

2. At the same time, treat the trees systemically from the roots up.

Done in the right proportions (of trimming and insecticides and fertilizers) most trees wiil survive and grow again.

I leave you geniuses to figure out hoe to apply this to the 1 Qn derivatives problem.

how on earth can these government bailouts even make a dent in the figures mentioned here. There needs to be some very slick thinking applied here and quickly. Personally I think the money should go to the needy not the greedy.Let them fall naturally one at a time until a natural level is found from which we can plan to move forward from with at least some certainty.Most of this crap is journal entry not real cash anyhow, so write it off and start again with proper checks and balances in place.Currencies are for the use of communities not for hording by sick freaks who get their rocks off on power tripping.Send them a lesson they will never forget. Break them now!!

Thank you so much for making DK Matai's work accessible to someone in rural central Ohio.

I just made a comment to an article in the Seattle Times on securitization ( http://seattletimes.nwsource.com/html/businesstechnology/2008477995_toxicdebt070.html ) that referred back to this page. If this is inappropriate, please let me know.

This is a fantastic article.

It points out perfectly one of the falicies of capitalism. Capitalism is touted as the most efficient means to run an economy and indeed a society, but that is not always true.

Capitalism breeds cooperation only when there is a tangible gain to be had by the cooperating parties. That's all fine and well, but often a 3rd party bears some expense, and is not compensated for it.

In my opinion, by not taking the 3rd party into consideration, the swaps as a contract should be invalidated.

I am so glad to see this Quadrillion figure finally getting some traction. That is exactly what we are dealing with. I knew it months ago:
http://mikecane2008.wordpress.com/2008/11/03/chronicles-of-depression-20-364-quadrillion/

And there is only ONE way out of it:
http://mikecane2008.wordpress.com/2008/11/20/chronicles-of-depression-20-427-777/

How many millions must starve, how many governments must fall, how much chaos must we endure before that step is recognized and taken?
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4285187/Biblical-debt-jubilee-may-be-the-only-answer.html

this is why we will not recover so quickly.

Table 19: Amounts outstanding of over-the-counter (OTC) derivatives

My understanding of the BIS numbers is different. 683 trillions is the overall number and the 60 trillion fx contracts are included in the 683 trillions.

But even then you'll get an derivatives exposure of more than 100.000 dollar ...

Stop the insanity!

Capitalism is insanity. This crisis is completely arbitrary and artificial but has such devastating consequences for 99.99% of the world who had nothing to do with setting up this situation. The bankers and politicians responsible should be jailed. How can anyone not be a socialist right now? We need to build a system based on human needs, it is the only way out.

Before you add numbers together, it would be helpful if you understood what they represent. Adding these numbers as you have done makes no sense.

There is a huge difference between derivatives such as futures traded on exchanges with well established margin requirements and clearing mechanisms vs off exchange contracts between counterparties.

To quote Han Solo from the first Star Wars movie, "I'm getting a bad feeling about this,..."

Once is an accident, twice is a coincidence, three times is a declaration of war; four times is the realization the declaration went unheard, five times is rape and six is hopefully the last.

Some notes from 'A Uniform Field Theory of Economics'; or 'Grand Theft Planet'by Tom Dennen.

"Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth's resources." - British financial analyst Chris Cook.

'Unregulated financial market' means that banks have been allowed to charge compound interest.

Even ancient Rome capped interest at max 5% and compound interest (usury) was outlawed (See Tacitus, The Annals of Rome, Chapter Six, a.d. 29).

"There is a nine-year period between a commodity peak and a market crash. Add forty-six to that (the average period between crashes) and you have a fifty-year-odd boom-bust cycle or once a generation we are plucked.- Tom Dennen, "A Unified Field Theory of Economics" (in progress.)

The above thought and the following compilation are from 'The Great Reckoning' by James Dale Davidson and William Rees-Mogg, Sidgwick & Jackson, 1993.

* First time: Commodity prices peaked in London in 1711 (Long before America came into the economic picture). The South Sea Bubble burst nine years later in 1720. Depression followed.

* Second: Producer prices peaked in London in 1763. The London stock market crashed again in 1772 (nine years later). Depression followed.

* Third: Commodity prices peaked in London in 1816.The London stock market crashed in 1825 (nine years later). Depression followed.

* Fourth: Wholesale prices peaked in New York in 1864. A worldwide assets crash began in May 1873 (nine years later). Depression followed.

* Fifth: Then followed our beloved Great Depression in the 30s, about which much has been said, from which, little learned.

* Sixth: Commodity prices peaked some fifty years later in Tokyo, in 1980. The Tokyo stock market peaked in 1989 (again, nine years later) and crashed in 1990. The depression following that crash is now upon us.

“I call this one, 'Grand Theft, Planet”, ibid, t.d.

From an article by Tom Foremski in the Silicon Watcher - October 16, 2008

"According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland -- the central bankers' central bank -- the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

1. Listed credit derivatives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

a. Interest Rate Derivatives at about USD 393+ trillion;

b. Credit Default Swaps at about USD 58+ trillion;

c. Foreign Exchange Derivatives at about USD 56+ trillion;

d. Commodity Derivatives at about USD 9 trillion;

e. Equity Linked Derivatives at about USD 8.5 trillion; and

f. Unallocated Derivatives at about USD 71+ trillion.
The Size of Derivatives Bubble now equals $190K Per Person on the Planet.

The bankers want our money NOW! And Obama is giving it to them!

Well, when do we stop tapping the keyboards and start dancing on some heads?

Chat is cheap.

Capitalism isn't insanity! And I don't think capitalism is the root of all the evil. But the banking system really needs to be upgraded, now it's evident to everybody.

The article is great, I've translated it into Belorussian and posted at my site, kraina.by.
Thanks.

These numbers are all misleading and it is clear you don't understand how this market actually works.

While total gross positions may be this large, the net positions, summed over each counterparty are much, much smaller. This is because if you put on a large CDS position, to remove it or make it smaller, you would put on another position in the opposite direction (i.e., sell rather than buy protection). Other derivative markets work the same way.

Having said that, there is a problem with the market as currently structured. The CDS market would work fine as long as everyone collateralized their positions. Unfortunately, many of the larger firms in the market (e.g., AIG) where not required to do this by the other market participants. The government just needs to (1) Require these to not trade OTC (2) Move the market onto an exchange and (3) require firms to MTM each day and exchange colleteral. Then this wouldn't be an issue. BTW - you'd still have the big numbers you are mentioning, but again, those are gross positions which is very misleading and you are clearly confusing the people who are reading this.

Derivatives aren't a part of capitalism so stop saying this is a reflection on capitalism.

You can have capitalism without all these stupid ideas attached to it.

Capitalism changes all the time, it moves from crisis to crisis because crisis is an inherent quality of capitalism. Marx figured that capitalism would eventually collapse because of its inherent instability but that hasn't yet happened. It seems capitalism has the capacity to recover from each crisis then move on to test the bounds of the next crisis...

I'm amazed that economists blame prior recessions/depressions on faulty Fed/government decisions. Boom and bust cycles are a function of capitalism. Thinking that they aren't, that we can eliminate booms and busts, is ridiculous nonsense.

Tom,

While I found your numbers entertaining and valuable, I have to agree with some others that they may be out of context. imho, the best analogy to many of the instruments discussed is simply gambling. When bets are placed (assessing risk) there is no tangible value until the outcome of the game. I agree that the trust factor is real, as you would want to be paid by the house. While some instruments may have underlaying assets providing value basis, the unmitigated growth and non-regulated nature of those that do not have simply created a lot of folks that can't/won't pay on their bets. And we worried about the wiseguys for how long?

This is some pretty technical info, but the bottom line is the same...we've got to stop the bleeding NOW!!!
How long before we're in the abyss with no hope of return?
Get rid of the Fed...abolish taxes...bailout the average citizen directly!!!

The $1.144 Trillion Worldwide Derivatives Market are dated December 2007. Is it possible to get an update with new figures for 2008 or a projected estimate for 2009? Thanks.

Manfred

New update would be very helpful with additional derivative figures for 2008 & 2009 with the listing of the top 10 countries. Thanks.

Manfred
manfred5@canby.com

Manfred, I will try and find some updated figures. Thanks for your interest.

One must remember that derivatives are a zero sum game; always a winner and a looser, like flipping a coin or placing a bet on a roulette table. The payout ratio is irrelevant. This being the case, it matters not the size or scope of derivatives trading in the world. More individuals betting against one another for the same coin flip has no effect on the underlying asset (or coin flip). They are all merely contributing to the vig, I mean commission the brokers and intermediaries receive for facilitating the bet. Focusing on the underlying asset is the real issue.
It is when the payout ratio of a derivative is skewed or imbalanced and defaults occur that holders of the derivative on one side of the equation may get burned. Image you purchased earthquake insurance, paid into it for years, and when an earthquake hits the insurer did not evaluate their risk and had an insufficient pool of resources to pay out for the damages. Unlike insurance that is regulated and requires the ability to cover the loss, derivatives are not regulated, perhaps because there may be no sound actuarial science that properly establishes risk. This is one of the reasons their growth and popularity has increased, because the possibility through greater understanding could yield extraordinary results, a free lunch at the others sides expense. Conventional markets, like stocks, are highly efficient, and all the free lunches (aside from illegal insider trading) have been eaten. Additionally, the extreme variation of derivatives and the nature of over the counter transactions can make regulating difficult.

Tom,

What I'm most interested in is just how much of those derivatives are *interest bearing*... And how much has been *loaned against them*.

Dave, unfortunately I don't have that information.

Sorry! These numbers are still NOT big enough. According to Gold$tein (and Company) in the Caymans, the toxic derivative time-bomb exceeds 1.25 quadrillion... and this estimate was given in the summer of 2009.

Rome is burning!

Are derivatives being created to short countries, states?
.......

http://jsmineset.com/

The Bi-Polar Moving Bretton Woods Meetings

Posted: Feb 07 2010     By: Jim Sinclair     

Dear CIGAs,
1. Bretton Woods was folded.

2. The floating exchange rate system is about to be folded.

3. By default or design we are going to a one-world currency and a one-world central bank of central banks.

4. For Portugal, Ireland, Italy, Greece or Spain to break off from the euro would be an expansion of the floating exchange rate system under present conditions. 

5. There are presently 3 major currencies. That is the US dollar, the euro and gold. 

6. The SDR was an attempt to form a single reserve currency that never took flight. 

7. The SDR is an accounting unit made up of an index of currencies much like the USDX.

There is no immunity now from the size of funds seeking to speculate or manipulate markets. This type of money is attacking the debt of the weaker euro states by intention or coincidence. Their success in the Iceland situation was only the first chapter of a multi chapter play.

Central bankers fear that this type of action, most certainly if it is as successful as it was on Iceland, succeeding against the weaker euro states could easily attack the present functional reserve currencies, the US dollar and the euro.

There is an implicit fear that if the ECB refuses to or cannot sustain the debt of Portugal, Ireland, Italy, Greece and Spain the next to fall will be both the US dollar and the euro.

The states of the US are no different, in form or short opportunity, than weak members of the euro. Already major money is short California, New York and Pennsylvania debt. A pounding of state debt is as easy as the pounding of the weaker members of the euro.

Attack of a currency is primarily an attack of the debt representing that currency.

Central banks are run by bankers who used to measure their capital in millions only a few years ago. After the invention of the OTC derivative they measured their capital as today in billions. They now imagine measuring their capital both of their banks and personally in the trillions as they challenge nations, not companies.

China knows this and is insulating itself from this.

To accomplish this end whilst maintaining and increasing the value of hard assets ( assets of major players) a new single reserve currency must be functionally initiated either by default or by design.

A singular world currency must be an index of many currencies adjusted from time to time. Adjustment within its membership is the key to a common currency that the EU forgot about.

Whatever institution manages that index becomes the central bank of central banks able to create artificial money according to its allocation of the single currency index. This is what was desired of the SDR originally.

The chances of reverting to a Bretton Woods or increasing the Floating Exchange rates are unlikely.

A collapse of the weaker states of the euro would be an expansion of the floating exchange rate strengthening the market forces that will attack all nations one by one after their success in Iceland. The weakest will be the first to go, but none are safe.

The chance of an abrupt change to something new now, as above, is unlikely. The probability of moving towards a one world currency in stages over the next 5 years is a reality.

In order to make that transition a method of raising the status of the IMF and the SDR would be most likely. Such a transition would be for this entity to assist in sustaining the weaker states of the euro and the USA as the states of the USA are now rolling over harder, balance sheet wise, than the weaker states of the euro

The debt of nations is not immune to the tsunami of these speculative and manipulative funds attacking by design or coincidence, focusing on a market all on one side – short.

OTC derivatives are being used in the strategy to collapse the weaker states of the euro.

OTC derivatives are the cause of this entire trauma by design or coincidence.

Nothing has been done to curtail or reduce the ever-growing mountain of these instruments.

All that has occurred is the new means of valuation as value to maturity, and the collapse of FASB requiring market valuation. Both items repaired the appearance of the balance sheet of the financial entities by allowing a cartoon of valuations to re-enter the system.

The decision will take place that is in the best interest of the majority power of four groups ruling these bi-polar central bank meetings. Those groups are the banksters, bankers, Daddy Warbucks and politicians.

continued