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Dangerous Derivatives
September 5, 2011
The investing world is undergoing quite a dramatic change. Professional traders and investors have been doing their thing over the past 40 or so years using mostly vehicles in the bond market (securities), stock market (equities) and realestate arenas. The so-called hard assets traded in the commodity markets have mostly been used by legitimate industries in order to hedge their losses in case of temporary, unforeseen economic hiccups.
But now, especially over the past decade, the derivatives market has become an estimated $600 trillion dollar market! No one really knows just how big this market is because there are so many different types of derivatives – and even derivatives of derivatives. And, if you recall, the MBS (Mortgage-Backed Securities) that were packaged up into different investment portfolios and marketed and sold to unsuspecting investors is the particular brand of derivative at the root of the 2008 financial crisis.
But derivatives are not limited to MBS. Financial wizards on Wall Street have mathematically tied pooled investments to Realestate, Bonds, Equities, Futures and Options in order to bring their clients specific opportunites, tailored to their needs. These investment vehicles have gotton so complex and yet so unregulated, it is just a matter of time before this bomb explodes. The 2008 crisis will look like a small ripple on a quiet pond when this next one hits.
In the late 1990’s, Brooksley Born, then chairman of the CFTC, warned about the potential threat to the economic system the unregulated derivatives market posed. But the insiders controlling the banking system, not to mention the political leaders in Washington, wouldn’t listen – nay, they even acted to supress her warnings. The derivatives market was making them too much money and they were not about to give that up.
Fast forward to today and we’ve recently witnessed our illustrious politicians as they’ve recognized the dangers that are still out there. They passed the Dodd-Frank bill into law. This is a bold and comprehensive set of measures, one of which seeks to regulate this dangerous derivatives market.
But the big banking institutions have been lobbying heavily to slow the implementation of Dodd-Frank. In fact, in the first 6 months of 2011, the financial industry has spent over $100 million campaigning to delay or water-down these regulations. Why? Two reasons: One is because it’s a racketeering industry making a lot of money for a select few; And two, because it’s so complex that it cannot even begin to be explained in any rational manner, thus impossible to regulate.
It’s a house of cards waiting to implode. And when it does, look out. If you’re not holding hard assets like gold and silver in your hands, you’ll be in big trouble because all those derivatives contracts are denominated in a fiat currency – for the U.S., it’s dollars.
Both sides of the trade (buyers and sellers) settle the trade in cash. When (not if) the major defaults come, the sellers won’t be able to cover. That will kick in yet more derivatives action – that of the CDS (Credit Default Swap) derivatives market. And when that happens, the major players won’t be able to cover those either.
Massive defaults will lead to yet another bail-out of major financial institutions. The inflation of the money supply necessary for these bail-outs will exceed anything we’ve seen before. This is a crash of truly epic proportions!
You will want to have something of value in your hands in order to trade anything because the fiat currencies will not be worth the paper on which they’re printed. Gold and Silver will be the preferred currencies.
So be sure you have your ounce(s) of gold or silver!!!
Contact the author of this article by sending an email to: Jon K
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