Results 1 to 10 of 10

Thread: The $516 Trillion Dollar Time Bomb

Threaded View

Previous Post Previous Post   Next Post Next Post
  1. #1
    Senior Member Mike C's Avatar
    Join Date
    Jul 2001
    Location
    Deutschland
    Posts
    4,892

    The $516 Trillion Dollar Time Bomb

    Bad Ju-Ju here.

    http://www.marketwatch.com/news/stor...&dist=printTop

    Derivatives the new 'ticking bomb'

    Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen

    ARROYO GRANDE, Calif. (MarketWatch) -- "Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.

    "We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

    Derivatives bubble explodes five times bigger in five years

    Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble was fueled by five key economic and political trends:
    1. Sarbanes-Oxley increased corporate disclosures and government oversight
    2. Federal Reserve's cheap money policies created the subprime-housing boom
    3. War budgets burdened the U.S. Treasury and future entitlements programs
    4. Trade deficits with China and others destroyed the value of the U.S. dollar
    5. Oil and commodity rich nations demanding equity payments rather than debt
    In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.
    .................................................. .................................................. ..............................

    Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

    To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:
    • U.S. annual gross domestic product is about $15 trillion
    • U.S. money supply is also about $15 trillion
    • Current proposed U.S. federal budget is $3 trillion
    • U.S. government's maximum legal debt is $9 trillion
    • U.S. mutual fund companies manage about $12 trillion
    • World's GDPs for all nations is approximately $50 trillion
    • Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
    • Total value of the world's real estate is estimated at about $75 trillion
    • Total value of world's stock and bond markets is more than $100 trillion
    • BIS valuation of world's derivatives back in 2002 was about $100 trillion
    • BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion
    Moreover, the folks at BIS tell me their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

    Also, keep in mind that while the $516 trillion "notional" value (maximum in case of a meltdown) of the deals is a good measure of the market's size, the 2007 BIS study notes that the $11 trillion "gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets."
    Last edited by Mike C; 03-11-2008 at 11:31 AM.
    "So I have stayed as I am, without regret, seperated from the normal human condition." Guy Sajer

Similar Threads

  1. My Story. Long so grab a coffee!
    By JonnyC in forum New SCI
    Replies: 7
    Last Post: 09-24-2005, 05:23 AM

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •