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Give or take $900,000,000,000,000 ($900 trillion)!!!!

December 12, 2012

When one researches the total size of the derivative market, you will find estimates ranging between $600 trillion-1.5 quadrillion — a $900 trillion range. How do we allow something so opaque, yet so potentially toxic, to have a $900 trillion range? I have written about derivatives on this blog more than any other subject (well, maybe with the exception of our central bank’s monetary policies), but in many ways these two issues are interrelated.

However, consider the sheer size of the derivatives market in light of the nature of derivative instruments. The best way to describe derivatives is to say they are wagers or bets. The derivative market is the casino of the world of finance and they have absolutely overwhelmed the banking industry. In the 2008 financial meltdown, we saw a very small glimpse of what a miniscule derivative meltdown looks like. I used to give a presentation titled, From M to B to T.  It was about how we view quantity. And I should note here how we deal with the quantity of money affects the quality of money. What we have done in increasing measure is change our measures of debt, derivatives and other nefarious items from million to billion to trillion without considering the full affect of what we are truly doing. I can see that I need to change my presentation to, From M to B to T to Q! (At least, as it relates to derivatives!)

The Comptroller of the Currency, Administrator of National Banks issued a report on U.S. banks’ holdings of derivatives that is quite enlightening. America’s biggest bank, for example, reports $1.8 trillion in total assets and $69 trillion in total wagers (derivatives). Now my argument has been that every bet produces one loser for every winner. Maybe the amount of winners and losers could balance out if everything were equal. But herein lays the problem: As we learned in the mini-meltdown of credit default swaps held in the subprime mortgage market, there is massive manipulation and advantages to insiders. The derivative casino is substantially worse odds than the casino you might visit in Las Vegas. At least in Vegas you can learn about the odds of various games and bets. In this new Wall Street casino, more times than not your bet, as an outsider, is to pay for the winnings in an already rigged game for insiders. Various news reports, investigations and even congressional hearings have revealed that derivatives were used to transfer investor’s monies to the pockets of bankers and hedge fund managers.

The credit default swaps that began to melt down in 2008 had a tourniquet applied to the rupture of a main artery in the form of accommodative monetary policy — and lots of it — and it’s still going… and going… and going…! (I just had to get in monetary policy.)

Here is a segment of the Comptroller of Currency report showing our largest banks’ derivative holdings:

OCC’s Quarterly Report on Bank Trading
and Derivatives Activities
Second Quarter 2012
$Millions

Chart

 

And putting M to B to T all in perspective… we do not have room for Q!

So the next time you hear someone toss around the phrase “trillion dollars,” that’s what they’re talking about.

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One Comment
  1. Wayne Heine permalink
    December 13, 2012 5:06 pm

    Jon,

    You and I have talked about this for years and as we have discussed it is not an matter of “if” but, “when” this house of cards falls. No nation in history has been able to overcome excessive/prolonged over spending, out of control debt build-up and continued denial of basic business principles and not paid a heavy price. Just look look at Rome with it’s “Bread and Circus” policies and the outcome is clear.

    Keep up the good work, some or us are listening! Wish you and your family a Very Merry Christmas and a Healthy and Happy New Year!

    Wayne

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