Never before in the history of the United States have we been faced with the threat of such a great financial catastrophe but, sadly, most Americans are totally oblivious to all of this. They continue to have faith that their leaders know what they are doing, and they have been lulled into complacency by the bubble of false stability that we have been enjoying for the last couple of years. Unfortunately for them, however, this bubble of false stability is not going to last much longer and when the financial crisis comes it is going to make 2008 look like a Sunday picnic. Let me explain why I believe the aforementioned to be the case.
The above are edited excerpts from an article* by Michael Snyder (theeconomiccollapseblog.com) originally entitled The Size Of The Derivatives Bubble Hanging Over The Global Economy Hits A Record High.
The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and the FREE Market Intelligence Report newsletter (register here; sample here) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Snyder goes on to say in further edited excerpts:
The Global Derivatives Bubble
The global derivatives bubble is now 20 percent bigger than it was just before the last great financial crisis struck in 2008 and when it finally bursts it is going to be a complete and utter nightmare for the financial system of the planet. Several “too big to fail” banks could fail simultaneously and when that day arrives, we are going to be facing a crisis that is going to make 2008 look like a Sunday picnic because, if they go down, we go down too.
According to the Bank for International Settlements, the total notional value of derivatives contracts around the world has ballooned to an astounding 710 trillion dollars…and if that sounds like a lot of money, that is because it is. The U.S. GDP, for example, is projected to be in the neighborhood of around 17 trillion dollars for 2014 so 710 trillion dollars is an amount of money that is almost incomprehensible.
What Is A Derivative?
(If you do not know what a derivative is, Mayra Rodríguez Valladares, a managing principal at MRV Associates, provided a pretty good definition in a recent article for the New York Times saying:
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.
In other words, a derivative does not have any intrinsic value. It is essentially a side bet. Most commonly, derivative contracts have to do with the movement of interest rates but there are many, many other kinds of derivatives as well. 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.)
Bigger Bubble = Greater Burst
Instead of actually doing something about the insanely reckless behavior of the big banks, our leaders have allowed the derivatives bubble and these banks to get larger than ever. In fact, the big Wall Street banks are collectively 37 percent larger than they were just prior to the last recession. In fact, the five largest banks account for 42 percent of all loans in the entire country, and the six largest banks control 67 percent of all banking assets.
In the New York Times article I mentioned above, Goldman Sachs and Citibank were singled out as two players that have experienced tremendous growth in this area in recent years:
Goldman Sachs has been increasing its derivatives volumes since the  crisis as part of its growth strategy. It had a portfolio of about $48 trillion at the end of 2013 and plans to sell more derivatives to clients. Citibank, too, has been increasing its derivatives portfolio, despite the numerous capital and regulatory challenges, In fact, its portfolio has risen by over 65 percent since the crisis — the most of any of the four banks — to $62 trillion.
It is not happening just in the United States. German banking giant Deutsche Bank has more than 75 trillion dollars of exposure to derivatives – which is more than any single U.S. bank has.
The derivatives bubble is a “sword of Damocles” that is hanging over the global economy by a thread day after day, month after month, year after year and, at some point, that thread is going to break, the bubble is going to burst, and then all hell is going to break loose. Why? Because virtually none of the underlying problems that caused the last financial crisis have been fixed. Instead, our problems have just gotten even bigger and the financial bubbles have gotten even larger.
If the stock market keeps going up, interest rates stay fairly stable, and the global economy does not experience a major downturn, this bubble will probably not burst for a while BUT, if there is a major shock to the system, this derivatives bubble is going to burst and several “too big to fail” banks could fail simultaneously. When that day arrives, we are going to be facing a crisis that is going to make 2008 look like a Sunday picnic because, if any of the “too big to fail” banks go down, we go down too.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://theeconomiccollapseblog.com/archives/the-size-of-the-derivatives-bubble-hanging-over-the-global-economy-hits-a-record-high (Copyright © 2014 The Economic Collapse)
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