Derivatives Bubble: the Ultimate Black Swan

In 2008 the housing bubble burst, sending this country, and indirectly the rest of the world, into a horrible recession. While it’s nearly impossible to really put a price tag on the bubble, economists have tried doing so. Most agree that it was about a $9 trillion bubble that had built up thanks to a plethora of bad decisions in the housing market as well as the stock market and AIG. If you’re really interested in the reasons, I recommend the book The Great Financial Crisis: Causes and Consequences by John Bellamy Foster and Fred Magdoff. You can find it on Amazon or download a free ebook of it here. You could also watch the HBO special “Too Big to Fail.” But this blog isn’t about that bubble. It’s about something much larger. A bubble that is so large right now, when it pops it could cripple the entire global economy, creating the worst global depression in the history of mankind. That bubble is the derivatives bubble, and it’s one that virtually no one is talking about.

Some people may read that statement and think I’m being a bit cynical but, unfortunately I’m not. As I said, the housing bubble was estimated at around $9 trillion. That’s about the equivalent to how much cash is in circulation in the United States right now. Now if you look at the derivatives market, the bubble is exponentially larger than that. The derivatives bubble is equal to somewhere between $600 trillion and $1.5 quadrillion dollars!  A burst to this bubble could literally cripple the entire global economy. And as mentioned before, virtually no one is talking about it.

If you turn on the news, you’ll hear all kind of talks about the fiscal cliff the country is facing, or the debt ceiling we’re about to hit again, or even about the $16 trillion debt that the US has built up, but you hear nothing about derivatives. Of course the reasoning for this is that the derivatives market is a highly complex thing that many ordinary people don’t understand. I won’t bother trying to give a detailed explanation of it but I’ll try to elaborate. The derivatives market is like a Las Vegas for Wall Street. They can make gigantic gambles on commodities and either win huge or lose billions. Earlier this year JP Morgan lost $2 billion in what the news called “bad bets.” No one even mentioned the word derivatives when it was being covered despite it being virtually the sole reason. If you want another staggering, and quite frankly frightening statistic, the top 9 banks in the United States,  have derivative exposures of $228.72 TRILLION dollars. That’s THREE times more money than in the global economy. No bank in the world is going to be able to cover that bail out. I don’t think people can wrap their heads around that number. If you had $100 million on 100 pallets, and made a 10×10 square, you’d have $1 billion in a square. Now imagine putting 100 more 10×10 squares on top of that and you’ve have a tower of money standing over 465 feet tall…and that’s just $1 trillion. Imagine 229 towers that height. If you need a visual reference, here’s one that you won’t believe. 

So how do we prevent this bubble from bursting? That’s the quadrillion dollar question that virtually no economist  in the world can answer. All we can do is hope and pray that it doesn’t or else we are looking at a global meltdown that cannot even be fathomed.


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