Friday, October 21, 2011

The Coming Greater Crash

For the last three years, the entire western world has been reeling in the after-effects of the crash of 2008.  Millions of words have been written about it, the causes analyzed and regulations have even been attempted.  It is widely recognized that CDOs - Collateralized Debt Obligations - and other derivatives, with the insane amounts of leverage generated were the cause.  Less frequently cited is the role of governments; largely the US government, but not exclusively.  Investopedia, a generally non-political source, has done a good investigatory piece on the crash, here, and conclude the real cause was largely government.

Unfortunately, the real problems were not addressed by the new regulations, such as the pointless Dodd-Frank law.  Nothing was done about these derivatives, and the problem is not only still there, it is getting bigger.  Much bigger.  How big?  The great financial blog Seeking Alpha says,
If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.

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:
    •  23 TIMES WORLD GDP.
It's hard to wrap your head around how big a number $1.4 quadrillion, or $1400 trillion, is.  You may have seen things going around that said if you had counted out a dollar per second since Christ was born you would not have reached a trillion dollars; it's not even close because at $1/sec, it would take 31,546 years to count out a trillion dollars.  At the same rate, 1400 trillion takes you back 31.5 million years.  Half the time since the last dinosaurs.

The Economic Collapse Blog picks up the story in the cheerily titled, "The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System" and reports of scary things going on, if not in secrecy, then just not being reported.  (source within a source)
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential. 
Who are these guys?  Where are they from?  Only the "too big to fail" banks that our taxes bailed out before:  JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.  As The American Dream reports, these groups are already trying to buy the 2012 election.  
3 of the top 7 donors to Obama's campaign were big Wall Street banks (Goldman Sachs, JPMorgan Chase and Citigroup).  Now Wall Street is doing it again.  The big Wall Street banks are already trying to buy the 2012 election. 
To my surprise, each bank has contributed the most to .. Mitt Romney!  (For the record, I'm one of the people who thinks Romney would be no big improvement for us and might even be worse)  While it's true I think the need for money in politics is not as great as most people think, clearly they don't agree with me, and furthermore, they have the record that if a candidate gets far and away more money than their competitor, the one with the biggest treasury ordinarily wins.  So long, Herman Cain!

The problem with these schemes, and our whole fiat, "debt = money" system, is that it can't keep expanding.  It will collapse some time, quite possibly some time very soon. Going back to quoting Economic Collapse:
It is inevitable that the same thing is going to happen again.  Except next time it may be on a much grander scale.

When "the house" goes "bust", everybody loses.  The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won't be any government on earth with enough money to put it back together again.

A horrible derivatives crisis is coming.

It is only a matter of time.

Stay alert for any mention of the word "derivatives" or the term "derivatives crisis" in the news.  When the derivatives crisis arrives, things will start falling apart very rapidly.


  1. Really nice recap, SiG.

    Were there enough people to understand what it means....TEOTWAKI.

    Brace for impact.

    Keep swinging,


  2. Herman Cain was head of the Kansas City Federal Reserve. He is a bankster that was all for TARP and theft of Americans for his Bankster friends. He also denied there was a housing bubble and economic collapse until 2008, so on top of being a theiving bankster, he is an idiot as well.
    See for yourself:

    Cain is an idiot.

  3. WarriorClass - just a note that I didn't mean to come across as a Cain fan. His name was just the first to pop into my mind for "someone with not much money" to contrast against Romney getting the big bucks from the "Too Big To Fail" banks.

    I'm officially undecided. It allows me to make fun of all of them.

  4. WarriorClass: You need to do some research on Cains positions re: his support for TARP and what he thinks on the FED. Although I do not agree with him on the FED he has a solid position and thats more then any of the others outside of Ron Paul. His support for TARP was short lived once it went to the banks. Lets not foreget how TARP was sold to all of us. (Although, I never supported it in anyway). Anyway, I do not see Romny or Perry as even slightly better then "politics as usual". I like Ron Paul but not as president but as Sec of THAT would be a great coup!


  5. Officially undecided? Let's see... they all suck and the only consistencies they show is they're inconsistencies. They are all out for themselves and are symbolic of the Demopublican Syndrome (both parties are the same). Seems like a pretty easy decision to me. Since they all suck, wait, what's this? There is one that doesn't fit the mold? He is a Constitutionalist, anti-Fed, sound money, maximum freedom type of candidate? Who is he, why have I not heard of him in the mainstream media? Ron Paul? Upon further investigation, most people with a brain should be "DECIDED"!

  6. EJ - Obviously, I'm quite aware of Ron Paul. You've hit every one of his strong points. Except for proposing to cut spending by $1 Trillion per year immediately.

    Unfortunately, he also has some areas I perceive as weak. They are virtually all foreign policy related. And I even agree with some of what he says there.

    My big issue is throwing out about 75% of the Code of Federal Regulations. Nobody has seriously said a word about that.

    Ron Paul is in the top few, and it's three months until I need to decide. There's no reason for me to not keep listening and trying to stack other candidates.

  7. I keep going back and forth: Ron Paul on principle (not 100% in agreement, but far more than any other candidate), or Cain because he has a shot and because it would be a nice big thumb in the eye of the Georgette Mosbachers (see Republicrats and Demopublicans, aka Tide/Cheer or Globetrotters & Generals) of the world.

  8. 1. If you follow the trail of money off Wall Street, you'll find that it inevitably flows towards "the accepted credential candidate" - ie, the one with the Ivy League degrees. In this case, we have Obama, who while having the credentials, isn't working out. So the next Ivy Leaguer in line is Romney, because the rest of the GOP field doesn't have the correct paperwork.

    2. Governments could solve this problem easily, if they were run by men with spines and sufficient testicular endowment. All that is necessary is to declare force majeure on the derivatives contracts. The banks can howl and scream, but government sovereigns have the ultimate political power: the force of arms. The bankers can say "We will collapse the economy," and governments in turn could say "That's nice. Say hello to your new cellmate, Bubba and Psychopathic Killer." Right now, governments don't and won't do this, because it is tantamount to putting their classmates into prison, and Harvard men just don't go to prison.

    3. What we're in isn't just a recession, it is properly called a debt deflation. The two economists who were (IMO) most prescient about what has happened since 2008 and what will continue to happen are: Irving Fisher and Hyman Minsky. If one googles around, one can find Fisher's seminal paper on debt deflations on a Federal Reserve website, and Minsky's paper of "Towers of Debt" is somewhere on some economics website. Minsky predicted where we are now, ie, using sovereign debt to paper over a collapse in private sector debt, which ultimately leads to governments trying to devalue or inflate their way out of their sovereign commitments. The debt problem is "layered," where new debt was issued under ever-more favorable terms to the borrowers in order to enable them to keep making payments on the previous tranche of debt... until interest rates go to zero, the terms become a begging "Please... take this loan, just PAY US BACK."

    Of course, what ends this charade is that the borrower reaches a point where they simply cannot service any more debt. They can't produce a sufficient cash flow to service all the debt, no matter how cheap the interest rate, how plausibly extended the duration of the debt... and default is inevitable.

  9. Anon 1402 - for reasons known only to Blogger, it filed this as spam until I went to tell it to post. My apologies if you were looking for this feedback.

    And thanks for an extremely cogent, well-reasoned comment.

  10. "My big issue is throwing out about 75% of the Code of Federal Regulations."

    That'll do for a start! Add in the complete fed tax code for a double play. Tax code should not need more than one page. For that matter, no law should.

  11. "there won't be any government on earth with enough money "

    They all have printing presses. Even Zimbabwe.

    And, Will, show me that one page tax code!

    Or write me a one page law that defines an aircraft carrier well enough to get one built.

    Or a one page law that gets the trash picked up in DC.

    I'm all for simplicity in Government, but some things are not simple.

  12. Staghounds, good point, bad examples. Aircraft carriers are bought by contract, not congressional action; congress just allocates the money (well, mostly). Likewise, contracts with city services are contracts written by contract lawyers.

    But I am a fan of the H.L. Mencken saying, "For every complex problem there is an answer that is clear, simple, and wrong.". The real art is going to be figuring out which 75% of the CFR to throw out. You know what? If they only throw out 50%, it would be a good start.

  13. Great post. Bookmarked for future reference.

    Posted in 2011. Do you plan to post an update? (Sorry if you have and I haven't found it yet...)