Quadrillion in derivatives $ 1.14-what it means for gold

Quadrillion? This is correct number use only astronomers, you know ... and the star of the North is "only" two quadrillion miles away?

But, rather, scary land economists really begin to use the number, too. No, not to discuss the amount of dollars there (although this may feel like the Fed pumped just a quadrillion greenbacks in economy). Recently, the Bank of international settlements reported that the amount of outstanding derivatives now reached $ 1.14 quadrillion signal (548 trillion dollars listed credit derivatives plus $ 596 trillion in notional [or face value] Over-the-counter derivatives).

Whether you're an astronomer or an economist, this is a very large number. In case you need a REFRESHER course, million mega-number followed by a billion followed by followed by trillion quadrillion (and, okay, quintillion and sextillion below). Yes, it takes a thousand trillion to compose a quadrillion, and, unfortunately, this is where we are today with this set of derivative mess.

Lever Madness

Derivatives, as you may know, are essentially unregulated, high-risk credit bets. Unlike the earnest farmer who might employ a futures contract to hedge the price of beans who worked so hard to grow, many banking institutions now use futures, forwards, options, swaps, swaptions, caps, collars and floors-the whole allokotoi inventory of leverage devices-to bet the hell out of virtually nothing.

What drives derivatives, with the roots (if you can somehow get back that far), are essential assets that get insane degree of exploitation. Martin Mayer writing for the Brookings Institute, said, "the receiver of the payments on these loans or securities has bought the securities for the duration of the swap on 95% margin, even though the law says nobody can buy securitieswithout putting up half the price. "

Extrapolated, $ 1.14 quadrillion in assets "owned" by something like 95% margin must be one of the scariest phenomena in the history of the economy.

Mathematicians and scholars are supposed to air traffic controllers of the derivative compound, keeping everything up-to-date, tangential and safe guarded. But a quadrillion-plus of these highly leveraged investment is like multiplying of America fleet from planes one million fold ... While not bothering to increase the number of air traffic controllers. The potential for economic damage here is simply overwhelming.

"Financial weapons of mass destruction"

So Warren Buffet derivatives warned six years ago.

"We believe the time bombs, both for the parties that relate to them and the financial system," is how the Oracle of Omaha put it.

The bomb almost went out in March 2008 with the collapse of Bear Stearns. The title of an article by noted analyst Ambrose Evans-Prichard-"rescue the Fed stopped a derivatives Chernobyl"-says almost everything you need to know.

According to the article, Bear Stearns held a jaw-dropping $ 13.4 trillion in derivatives, which is greater than the u.s. national income ". So when all derivatives went? Well, this time anyway, JP Morgan was encouraged to add derivatives bearing its own 77 trillion portfolio, giving the financial giant a grand total of $ 90 trillion in wobbly these investments.

Which begs the question, why don't we just let Bear Stearns-$ 13 trillion in derivatives and all-go belly up? Will not be taught the nation a valuable lesson and given Wall Street a long-deserved wake-up call? "Twenty years ago the Fed would have let Bear Stearns go," said specialised credit William Sels. "Now it is too interlinked to fail."

Which means that a Bear Stearns collapse now could be the first Domino to fall in ancient domino configuration tomorrow. All derivatives are really interlinked. So, expect the Fed to move with speed-rescue SWAT TEAM as any bank struggling with derivatives.

But what happens when even that isn't enough?

Surviving the coming collapse of derivatives

Finally, shockingly, something will go wrong. A bank will shrink, some mathematician will miscalculate or the Fed it is simply not going to react sufficiently quickly next time and the entire $ 1.4 quadrillion derivative compound would just "go Chernobyl." not Only can $ 1.4 quadrillion since then. It may be many more.

What will be the consequences?

What happened, you wouldn't be pretty. Report an emergency Bear Stearns, James Melcher, known hedge fund manager, said, "there was a danger of a total meltdown at the beginning of last week. I think that most people have some idea how bad this chain could have been. "

The New York Times was even more pointed: "If the Fed did not act this morning and fly (Stearns) did default on its obligations, which could have triggered a widespread panic and possibly a collapse of the financial system."

Yes ... the times said.

But there's too much leverage and too much money, greed and too many shenanigans at made here involved to believe this story has a happy ending. So, when you really need to buy some "insurance derivative collapse".

You must buy gold.

Think gold-this beautiful glittery precious metals-as its own monetary system, excellent investment were divorced from the boy paper money has kept so many nasty derivatives beasts. Should the worst happen, gold will represent the only economic logic. investors are not distorted by a secondary collapse will flock to the precious metal, if only to wait things out.

If you just rolled your eyes Bear Stearns, Google to see how close we came. Then go and look in gold ... before we start wondering just how $ 1 quintillion derivatives.