Thursday, May 29, 2014

What Comes After $999 Trillion?

Easy answer: $1 quadrillion.  The world derivative bubble is headed there and it will be fascinating to see if it crosses the quadrillion dollar threshold before it bursts (all bubbles eventually pop).

According to the Bank of International Settlements (BIS), the world OTC derivative market expanded through the end of 2013 to a record $710 Trillion.  
OTC derivatives markets continued to expand in the second half of 2013. The notional amount of outstanding contracts totalled $710 trillion at end-2013, up from $693 trillion at end-June 2013 and $633 trillion at end-2012.
I should note that the BIS uses an accounting method that's different from some other organizations.  I don't find that to really be a terribly big deal because the important thing is the ability to compare year to year rather than count trillions; it's like the statement in corporate Annual Reports that the data has been handled in accordance with Generally Accepted Accounting Principles and they explain if the method they used varied from the last year.  According to other accounting methods, though, we crossed that quadrillion dollar line for the size of the bubble some time ago.  It's just a few trillion dollars difference.  I mean, a trillion here, a trillion there; pretty soon you're talking real money. 

According to those ever-observant guys at the Economic Collapse Blog, that's 20% bigger than the derivatives bubble was before the 2008 worldwide crash, and a larger total than the world has ever seen.  The "Gross World Product" by the way, all the goods produced, services rendered and all economic activity totals under $100 trillion, as an estimate based on data through 2012

What are these derivatives?  The short answer is they're bets.  The big banks and ultrawealthy are betting on the future values of assets.  As  Mayra Rodríguez Valladares, a managing principal at MRV Associates, puts it in that Economic Collapse Blog entry:
A derivative, put simply, is a contract between two parties whose value is determined by changes in the value of an underlying asset. Those assets could be bonds, equities, commodities or currencies. The majority of contracts are traded over the counter, where details about pricing, risk measurement and collateral, if any, are not available to the public.
Since they're betting on assets that are many times the value of "all the money in the world", they can't all possibly pay out - there isn't enough money to pay for them.  People are betting on just about anything and everything that you can imagine, and Wall Street has been transformed into the largest casino in the history of the planet.  You will note that never, in any casino, does everyone win.
Many people naively assume that since "financial reform legislation" was passed (Dodd-Frank), the major banks would be less risk than they were in '08.  Not at all the case.  It has been reported by essentially everyone that Dodd-Frank did nothing to fix any of the causes of the last crash.  A bigger crash is coming, and it's going to be rough.


  1. You know, this sort of alarm was raised about the options market at one time, and it proved baseless for a single overriding reason: the market balanced. Bets on calls were equalled by bets on puts.

    What's the equivalent in the derivatives market, and has anyone bothered to consider it before becoming agitated?

  2. Robert the BikerMay 30, 2014 at 7:20 AM

    I thought it was officially 'one shitload', but since money is created out of thin air nowadays who knows? I do not believe we will see a change until a great deal of hurt has been handed out.

  3. Francis - I don't think the information exists for someone to do such an analysis. That quote on derivatives I used said for these OTC derivative trades "details about pricing, risk measurement and collateral, if any, are not available to the public. "

    But it's a point well taken. A normally functioning market takes care of this with no intervention. The thing is, Dodd-Frank institutionalized "Too Big To Fail" banks and these are the guys playing the game big time. Go read the stats on the EC Blog link I have.

    The status quo can go on as it is for an unpredictable amount of time. The analogy if buckling in a mechanical system. Roll up a sheet of printer paper into an 11" long tube, and put a piece of scotch tape on it to keep it from unraveling. Stand it on end and put some large cans of food on it. If they're well balanced you can stack a surprising amount of weight. At some point, either by a tiny sideways force, or just the load itself, it suddenly buckles and collapses all at once.

    When it collapses, Dodd-Frank means taxpayers bail out the banks who lose on their bets. Like all crony capitalism, it privatizes profit and socializes losses, so that we pay if they lose.

    1. "so that we pay if they lose."

      Hopefully next time there is a massive tax revolt. Let the bankers choke on their fraudulent paper.