The Size of the Derivatives Bubble = $190K Per Person on Planet
The Invisible One Quadrillion Dollar Equation
by DK Matai
Global Research, March 16, 2009
siliconvalleywatcher.com
The Invisible One Quadrillion Dollar Equation:
Asymmetric Leverage and Systemic Risk
According to various distinguished sources including the Bank for International Settlements in Basel, Switzerland -- the central bankers' bank -- the amount ofoutstanding derivatives worldwide as of December 2007 crossed USD1.144 Quadrillion, ie, USD 1,144 Trillion.
The main categories ofthe USD 1.144 Quadrillion derivatives market were the following:
1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter derivativesstood innotional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at aboutUSD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion;
f. Unallocated Derivatives at about USD 71+ trillion.
Quadrillion? That is a number only super computing engineers andastronomers used to use, not economists and bankers! For example,the North star is "just" a couple of quadrillion miles away, ie,a few thousand trillion miles. The new "Roadrunner" supercomputerbuilt by IBM for the US Department of Energy's Los Alamos NationalLaboratory has achieved a peak performance of 1.026 Peta Flop persecond -- becoming the first supercomputer ever to reach this milestone.
One Quadrillion Floating Point Operations (Flops) per second is 1Peta Flop/s, ie, 1,000 Trillion Flops per second. It is estimated that all the data found on all the websites and stored on computersacross the world totals more than One Exa byte of memory, ie, 1,000Quadrillion bytes of data.
Whilst outstanding derivatives are notional amounts until they are crystallised, actual exposure is measured by the net credit equivalent.This is normally a lower figure unless many variables plot a locusin the wrong direction simultaneously. This could be because of catastrophic unpredictable events, ie, "Black Swans", such as cascades of bankruptcies and nationalisations, when the net exposure can balloon and become considerably larger or indeed because some extremely dislocating geo-political or geo-physical events take place simultaneously.
Also, the notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. This means that no large OTC derivative house can be allowed to go broke without falling into the arms of another. Whatever funds within reason are required to rescue failing international investment banks, deposit banks and financial entitiesought to be provided on a case by case basis. This is the asymmetric nature of derivatives and here lies the potential for systemic risk to the global economic system and financial markets if nothing isdone.
Let us think about the invisible USD 1.144 quadrillion equation with black swan variables -- ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product,real estate, world stock and bond markets coupled with unknown unknowns or "Black Swans". What would be the relative positioning of USD 1.144quadrillion for outstanding derivatives, ie, what is their scale:
1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.
4. The real estate of the entire world is valued at about USD 75 trillion.
5. The world stock and bond markets are valued at about USD 100 trillion.
6. The big banks alone own about USD 140 trillion in derivatives.
7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all 'collapsed' because of complex securities and derivatives exposures in September.
8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.
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Of course, the U.S. is unique.
And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.
In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding. (Tun Mahathir can attest to that)
The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.
Catch more here:
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Autumn is coming
Money trees are shaking
Elitism is scheming
One last chance at robbing
Poor,poor us are starving.......
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