derivatives

The Global Template for Collapse: The Enchanting Charms of Cheap, Easy Credit

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creditCharles Hugh Smith – According to polls, the majority of Greek citizens want the benefits of membership in the euro/EU and the end of EU-imposed austerity. The idea that these are mutually exclusive doesn’t seem to register.

This is the discreet charm of magical thinking: it promises an escape from the difficulties of hard choices, tough trade-offs, the disruption of vested interests and most painfully, the breakdown of the debt machine that has enabled the distribution of swag to virtually everyone in the system (a torrent to those at the top, a trickle to the majority at the bottom, but swag nonetheless).

If we had to summarize the insidious charm of magical thinking, we might start with the overpowering appeal of using credit to ease all difficulties.

Need money to fund various healthcare/national defense rackets? Borrow the money. Need to keep people employed building ghost cities in the middle of nowhere? Borrow the money. Need to keep buying shares of the company’s stock to push the value of each share ever higher? Borrow the money.

The problem with cheap, easy credit is Cheap, easy credit destroys discipline. The lifetime costs of debt taken on to fund bridges to nowhere, healthcare/national defense rackets, ghost cities, stock buybacks, etc. are never calculated. The opportunity costs are also never calculated.

When credit is costly and hard to get, marginal borrowers can’t get loans and nobody dares borrow at high rates of interest for low-yield, high-risk schemes. When credit is costly and hard to get, what doesn’t pencil out doesn’t get funded.

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Can Governments Save The Economy by Injecting Money Into Our Bank Accounts?

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Phillip J. Watt – There is increasing dissatisfaction across the globe with the incompetency, corruption and malpractice of the interdependent finance sector, especially after the Global Financial Crisis in 2008 that crippled national economies all over the world and sent millions of people into unemployment. Thousands also lost their homes, as well as huge portions of their superannuation, whilst the commercial banking sector was bailed out of the mess that they created with trillions of dollars of Quantitative Easing (QE) central bank cash injections.

societyInvoking more anger is that this approach hasn’t even solved the problem; it has only prolonged and amplified it. There have been no real legislative, structural or policy changes, so we are now faced with even greater threats by massive global bubbles in derivatives, real estate and assets, such as stocks. It looks like there is even the potential to have a greater reset then the great depression of 1929.

While governments and corporations remain focused on failing models of perpetual economic growth, millions of people across the world are on food stamps, dependent on government subsidies to stay above the poverty line. Income disparity has never been so vast. Profits for corporations, particularly the multinationals, are near all-time highs, whilst wages have remained stagnant. High unemployment is epedimic and is much more severe than what official figures represent. Continue reading →

Rising Gold Price Could Set Off Derivative Nightmare [Video]

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goldGreg Hunter – Bill Murphy, Chairman of GATA (Gold Anti-Trust Action Committee), says precious metal prices have been relentlessly rigged by central banks and governments.  Murphy contends, “If gold were to just have kept pace with inflation, forget all the QE, it would be double what it is today.  That’s how artificially low the price of gold is today, and also silver.  Once they lose control of silver, it will go from $22 to $100 per ounce very fast.”

Murphy claims that one reason precious metal prices are suppressed is central banks are afraid of what Murphy calls “a derivative nightmare” touched off by a rising gold and silver prices.  Murphy explains, “We saw some of this before in 2008.  There is counter-party risk all over the place, and it could set off like a nuclear reaction where there is one default after another.   Derivatives have exploded to $250 trillion, or just pick a number.  They don’t know what the outcome could be if they start getting this kind of reaction.  So, they are maniacal in trying to keep the gold and silver prices in line.”

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Murphy goes on to point out, “Silver is the only market that in which the authorities have not found wrongdoing in a market they have been investigating–the only one after a five year investigation.  It is bizarre how that could happen.  All this evidence we have collected is like a murder trial.  If you were sitting on a jury . . .  and looked at all the evidence, you would say guilty beyond a reasonable doubt.  People don’t want to go there because we (GATA) are taking on all the money and power in the world.” Continue reading →

The Six Too Big To Fail Banks In The U.S. Have 278 Trillion Dollars Of Exposure To Derivatives

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Michael Snyder – The very same people that caused the last economic crisis have created a 278 TRILLION dollar derivatives time bomb that could go off at any moment.  When this absolutely colossal bubble does implode, we are going to be faced with the worst economic crash in the history of the United States.

derivativesDuring the last financial crisis, our politicians promised us that they would make sure that “too big to fail” would never be a problem again.  Instead, as you will see below, those banks have actually gotten far larger since then.  So now we really can’t afford for them to fail.

The six banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo.  When you add up all of their exposure to derivatives, it comes to a grand total of more than 278 trillion dollars.  But when you add up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars.  In other words, these “too big to fail” banks have exposure to derivatives that is more than 28 times greater than their total assets.  This is complete and utter insanity, and yet nobody seems too alarmed about it.  For the moment, those banks are still making lots of money and funding the campaigns of our most prominent politicians.  Right now there is no incentive for them to stop their incredibly reckless gambling so they are just going to keep on doing it.

So precisely what are “derivatives”?  Well, they can be immensely complicated, but I like to simplify things.  On a very basic level, a “derivative” is not an investment in anything.  When you buy a stock, you are purchasing an ownership interest in a company.  When you buy a bond, you are purchasing the debt of a company.  But a derivative is quite different.  In essence, most derivatives are simply bets about what will or will not happen in the future.  The big banks have transformed Wall Street into the biggest casino in the history of the planet, and when things are running smoothly they usually make a whole lot of money. Continue reading →

Fed Rate Rise Would Smoke Derivatives [Video]

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Financial writer Bill Holter says don’t expect the economy to get better anytime soon.  Holter says, “We’re probably in recession again . . . the economy has been quite weak.  It looks to me Holterwe could be breaking down in the stock market.  This is going to be a really critical week.”

On the Federal Reserve raising interest rates, Holter contends, “From a credibility standpoint, the Fed has to raise rates.  In a real world, I don’t think they can raise rates.  If they raise rates, my guess within two weeks you will see all the markets close.  A rate rise, even a quarter of a point in Fed Funds, would smoke derivatives.  You would see a chain reaction, and we would probably see a chain reaction even before they raise rates.”

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Holter contends the banking system is interconnected and very weak and explains his point by saying, “Look at what happened when the Swiss dropped their peg to the euro.  That basically has tanked the Austrian banking system.  The Austrian banking system is on the verge of collapse because they lent in Swiss Francs.  The strength in the Swiss Franc makes those loans much more difficult to pay back.  That’s thrown the entire (Austrian) banking system out of kilter.  If you do that with the dollar and you raise rates, and the dollar gets strong or spikes up 5% or 10% overnight, what’s that going to do to banks all over the world?  That’s going to create a smoking black hole of derivatives.”  Continue reading →