When panic and fear dominate financial markets, gold and silver both tend to rapidly rise in price. We witnessed this during the last financial crisis, and it is starting to happen again. Because I am the publisher of a website called The Economic Collapse Blog, I am often asked about gold and silver when I do interviews. In fact, just a few days ago I was sitting right next to Jim Rickards during the taping of a television show when this topic came up. Jim expressed his belief that investing in gold is superior to investing in silver, but I had the exact opposite viewpoint. In this article, I would like to elaborate on why I believe that silver represents a historic investment opportunity right now.
I should start out by disclosing that my wife and I have been able to put away a little bit of silver over the years. I wish that it could have been a lot more, but so often there are other priorities that need to be addressed. For example, I have always said that people need to take care of their emergency food storage first before even thinking about any kind of investments.
But if you have money left over after taking care of the basics, I am fully convinced that silver is a wonderful investment for the mid to long term. In this article, I am going to explain why this is the case. However, I have always warned that you have got to be ready for a rollercoaster ride if you get into precious metals. So if you can’t handle the ups and downs, you should probably avoid them altogether.
As I write this article, the price of gold is sitting at $1254.30 an ounce.
Meanwhile, the price of silver is sitting at just $15.81 an ounce.
That means that the price of gold is currently more than 79 times higher than the price of silver. For the ratio between gold and silver to be this high is truly unusual.
You see, the truth is that there is only about 17 times as much silver as there is gold in the Earth’s crust. And currently silver is being mined at about an 11 to 1 ratio to gold.
So it makes sense that throughout history gold has typically sold at about a 15 to 1 ratio to silver.
During the years to come, I do believe that gold will multiply in price.
But I am also convinced that the price of silver will go up much, much faster.
As they both skyrocket in price, the price ratio between gold and silver will shift very quickly from 79 to 1 in the direction of 15 to 1.
Perhaps we may never even get all the way back to 15 to 1, but if we even got to 40 to 1 or 30 to 1, what that would mean for silver would be history making.
Let us also keep in mind that unlike gold, silver is constantly being used up in thousands of different industrial applications. The following comes from Jeff Nielson…
Over the past quarter century, more silver-based patents have been created than with any other metal on the planet. But not only does silver have unparalleled versatility, it is an extremely potent metal, meaning that in many of its commercial applications it is used in only trace amounts.
Why is this of significance? Because in such tiny quantities it is economically impractical to ever recycle any of this silver, at prices anywhere near the (absurd) levels of recent decades. Thus this silver is being consumed in tiny amounts, but in billions and billions of consumer products, over a span of decades.
Unlike gold, our stockpiles of silver are disappearing. As previously mentioned, for at least the last thirty years, the only way that our strong demand for silver could be satisfied has been through consuming portions of these stockpiles.
It has been estimated that approximately one billion ounces of silver have been used in consumer products over the past ten years alone.
Even if the world could somehow avoid the great financial turmoil that has already begun, the truth is that eventually a great demand crunch for silver would come just based on how much of it we are steadily consuming.
At less than 16 dollars an ounce right now, silver is ridiculously undervalued.
Those that are wise see this, and they are stocking up on silver coins at an unprecedented level. Just check out these numbers…
Silver Eagle sales will likely jump by 25% in the first quarter due to deteriorating market conditions. During the first three months last year the U.S. Mint sold 12 million Silver Eagles. Already, sales of Silver Eagles have reached 13 million. There are two weeks remaining in March and the U.S. Mint will likely sell another two million. This will put total Silver Eagle sales for the first quarter at 15 million….. the highest ever.
I have always said that I believe that the price of silver will eventually go over $100 an ounce.
When that happens, those that got in today will be exceedingly happy with their returns.
Others are projecting even greater gains. For instance, investing legend Egon von Greyerz believes that the price of silver could ultimately go as high as $660 an ounce, and Jeff Nielson believes that $1,000 an ounce for silver would be a fair price.
But once again, don’t even think about getting into precious metals until you have the basics squared away. It is often said that you can’t eat gold or silver, and that is very true.
In our new television show, my wife and I are always going to tell it to you straight. A lot of people out there are relaxing right now because they think that the recent stock market rally means that the crisis is over. What they don’t understand is that this new financial crisis is just in the very early chapters. There are going to be more ups and more downs, and the shaking that we have seen so far is just the beginning.
Many of you may not want to believe me at this moment, but by the end of 2016 life in America is going to look dramatically different than it does right now. So please get prepared while you are still able to do so.
Did you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st? We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“. In other words, it could be a “Lehman Brothers moment” for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion. That is an increase of $14 trillion in just a little bit more than 5 years. Much of that “hot money” has flowed into stocks, bonds and real estate in the United States. So what do you think is going to happen when that bubble collapses?
The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen. Never before has so much private debt been accumulated in such a short period of time. All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads. In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014.
Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money. But the truth is that what has been happening in China surpasses all of their efforts combined. You can see an incredible chart which graphically illustrates this point right here. As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…
Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.
As with all other things in the financial world, what goes up must eventually come down.
And right now January 31st is shaping up to be a particularly important day for the Chinese financial system. The following is from a Reuters article…
The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.
Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.
If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly. A recent Forbes article explained why this is the case…
A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.The result?The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.
The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China. According to Forbes, M2 in China increased by 13.6 percent last year…
And at the same time China’s money supply and credit are still expanding.Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.Optimists say China is getting its credit addiction under control, but that’s not correct.In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.
Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.
Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.
If current trends continue, many other big banks will soon be experiencing a “bond headache” as well. At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years. Investors overwhelmingly believe that yields are heading higher.
If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.
This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.
So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?
In the end, it doesn’t really matter. The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.
The vast majority of Americans are going to be absolutely blindsided by what is coming. They don’t understand how our financial system works, they don’t understand how vulnerable it is, and most of them blindly trust that our leaders know exactly what they are doing and that they will be able to fix our problems. As a result, most Americans are simply not prepared for the massive storm that is heading our way. Most American families are living paycheck to paycheck, most of them are not storing up emergency food and supplies, and only a very small percentage of them are buying gold and silver for investment purposes. They seem to have forgotten what happened back in 2008. When the financial markets crashed, millions of Americans lost their jobs. Because most of them were living on the financial edge, millions of them also lost their homes. Unfortunately, most Americans seem convinced that it will not happen again. Right now we seem to be living in a “hope bubble” and people have become very complacent. For a while there, being a “prepper” was very trendy, but now concern about a coming economic crisis seems to have subsided. What a tragic mistake. As I pointed out yesterday, our entire financial system is a giant Ponzi scheme, and there are already signs that our financial markets are about to implode once again. Those that have not made any preparations for what is coming are going to regret it bitterly. The following are 17 signs that most Americans will be wiped out by the coming economic collapse…
#1 According to a survey that was just released, 76 percent of all Americans are living paycheck to paycheck. But most Americans are acting as if their jobs will always be there. But the truth is that mass layoffs can occur at any time. In fact, it just happened at one of the largest law firms in New York City.
#227 percent of all Americans do not have even a single penny saved up.
#346 percent of all Americans have $800 or less saved up.
#5 Wages continue to fall even as the cost of living continues to go up. Today, the average income for the bottom 90 percent of all income earners in America is just $31,244. An increasing percentage of American families are just trying to find a way to survive from month to month.
#7 Small business is becoming an endangered species in America. In fact, only about 7 percent of all non-farm workers in the United States are self-employed at this point. That means that the vast majority of Americans are depending on someone else to provide them with an income. But what is going to happen as those jobs disappear?
#8 In 1989, the debt to income ratio of the average American family was about 58 percent. Today it is up to 154 percent.
#9 Today, a higher percentage of Americans are dependent on the government than ever before. In fact, according to the U.S. Census Bureau 49 percent of all Americans live in a home that gets direct monetary benefits from the federal government. So what is going to happen when the government handout gravy train comes to an end?
#11 It is estimated that less than 10 percent of the U.S. population owns any gold or silver for investment purposes.
#12 It has been estimated that there are approximately 3 million “preppers” in the United States. But that means that almost everyone else is not prepping.
#1344 percent of all Americans do not have first-aid kits in their homes.
#1448 percent of all Americans do not have any emergency supplies stored up.
#1553 percent of all Americans do not have a 3 day supply of nonperishable food and water in their homes.
#16 One survey asked Americans how long they thought they would survive if the electrical grid went down for an extended period of time. Incredibly, 21 percent said that they would survive for less than a week, an additional 28 percent said that they would survive for less than two weeks, and nearly 75 percent said that they would be dead before the two month mark.
#17 According to a survey conducted by the Adelphi University Center for Health Innovation, 55 percent of Americans believe that the government will come to their rescue when disaster strikes.
Just because you are living a comfortable middle class lifestyle today does not mean that it will always be that way.
If you doubt this, take a look at what is going on in Greece. Many formerly middle class parents in Greece have become so impoverished that they are actually dumping their children at orphanages so that they won’t starve…
Scores of children have been put in orphanages and care homes for economic reasons; one charity said 80 of the 100 children in its residential centres were there because their families can no longer provide for them.
Ten percent of Greek children are said to be at risk of hunger. Teachers talk of cancelling PE lessons because children are underfed and of seeing pupils pick through bins for food.
If the U.S. economy crashes and you lose your job, how will you and your family survive?
Will you and your family end up homeless and totally dependent on the government for your survival?
As stocks have risen in recent years, the big hedge funds and the “too big to fail” banks have used borrowed money to make absolutely enormous profits. But when you use debt to potentially multiply your profits, you also create the possibility that your losses will be multiplied if the markets turn against you. When the next stock market crash happens, and the gigantic pyramid of risk, debt and leverage on Wall Street comes tumbling down, will highly leveraged banks such as Goldman Sachs ask the federal government to bail them out? The use of leverage is one of the greatest threats to our financial system, and yet most Americans do not even really understand what it is. The following is a basic definition of leverage from Investopedia: “The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.” Leverage allows firms to make much larger bets in the financial markets than they otherwise would be able to, and at this point Goldman Sachs and the big hedge funds are pushing leverage to ridiculous extremes. When the financial markets go up and they win on those bets, they can win very big. For example, revenues at Goldman Sachs increased by about 30 percent in 2012 and Goldman stock has soared by more than 40 percent over the past 12 months. Those are eye-popping numbers. But leverage is a double-edged sword. When the markets turn, Goldman Sachs and many of these large hedge funds could be facing astronomical losses.
Sadly, it appears that Wall Street did not learn any lessons from the financial crisis of 2008. Hedge funds have ramped up leverage to levels not seen since before the last stock market crash. The following comes from a recent Bloomberg article entitled “Hedge-Fund Leverage Rises to Most Since 2004 in New Year“…
Hedge funds are borrowing more to buy equities just as loans by New York Stock Exchange brokers reach the highest in four years, signs of increasing confidence after professional investors trailed the market since 2008.
Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley. Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show.
So why is this so important?
Well, as a recent Zero Hedge article explained, even a relatively small drop in stock prices could potentially absolutely devastate many hedge funds…
What near record leverage means is that hedge funds have absolutely zero tolerance for even the smallest drop in prices, which are priced to absolute and endless central bank-intervention perfection – sorry, fundamentals in a time when global GDP growth is declining, when Europe and Japan are in a double dip recession, when the US is expected to report its first sub 1% GDP quarter in years, when corporate revenues and EPS are declining just don’t lead to soaring stock prices.
It also means that with virtually all hedge funds in such hedge fund hotel names as AAPL (the stock held by more hedge funds – over 230 – than any other), any major drop in the price would likely lead to a wipe out of the equity tranche at the bulk of AAPL “investors”, sending them scrambling to beg for either more LP generosity, or to have their prime broker repo desk offer them even more debt. And while the former is a non-starter, the latter has so far worked, which means that most hedge funds have been masking losses with more debt, which then suffers even more losses, and so on.
By the way, Apple (AAPL) just fell to an 11-month low. Apple stock has now declined by 26 percent since it hit a record high back in September. That is a very bad sign for hedge funds.
But hedge funds are not the only ones flirting with disaster. In a previous article about the derivatives bubble, I pointed out the ridiculous amount of derivatives exposure that some of these “too big to fail” banks have relative to their total assets…
According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are…
Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)
Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)
Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)
Bank Of America
Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)
Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)
Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)
Take another look at those figures for Goldman Sachs. If you do the math, Goldman Sachs has total exposure to derivatives contracts that is more than 362 times greater than their total assets.
That is utter insanity, but we haven’t had a derivatives crash yet so everyone just keeps pretending that the emperor actually has clothes on.
When the derivatives crisis happens, things in the financial markets are going to fall apart at lightning speed. A recent article posted on goldsilverworlds.com explained what a derivatives crash may look like…
When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivates (think JP Morgan, Citygroup, Goldman Sachs) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for their obligation. All of a sudden the hedged position becomes a naked position. The net position becomes a gross position. The risk explodes instantaneously. Markets realize that their hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are not functioning anymore; stock markets remain closed, money at the banks become inaccessible, etc.
But for now, the party continues. Goldman Sachs and many of the big hedge funds are making enormous piles of money.
In fact, according to the Wall Street Journal, Goldman Sachs recently gave some of their top executives 65 million dollars worth of restricted stock…
Goldman Sachs Group Inc. GS -0.76% handed insiders including Chief Executive Lloyd Blankfein and his top lieutenants a total of $65 million in restricted stock just hours before this year’s higher tax rates took effect.
The New York securities firm gave 10 of its directors and executives early vesting on 508,104 shares previously awarded as part of prior years’ compensation, according to a series of filings with the Securities and Exchange Commission late Monday.
And the bonuses that employees at Goldman receive are absolutely obscene. A recent Daily Mail article explained that Goldman employees in the UK are expected to receive record-setting bonuses this year…
Britain’s army of bankers will re-ignite public fury over lavish pay rewards as staff at Goldman Sachs are expected to reward themselves £8.3 billion in bonuses on Wednesday.
The American investment bank, which employs 5,500 staff in the UK, will be the first to unveil its telephone number-sized rewards – an average of £250,000 a person – as part of the latest round of bonus updates.
The increase, up from £230,000 last year, comes as British families are still struggling to make ends meet five years after banks brought the economy to the brink of meltdown.
Wouldn’t you like to get a “bonus” like that?
Life is good at these firms while the markets are going up.
You can tell a lot about a nation by the condition of the infrastructure. So what does our infrastructure say about us? It says that we are in a very advanced state of decay. At this point, much of America is being held together with spit, duct tape and prayers. Our roads are crumbling and thousands of our bridges look like they could collapse at any moment. Our power grid is ancient and over a trillion gallons of untreated sewage is leaking from our aging sewer systems each year. Our airports and our seaports are clogged with far more traffic than they were ever designed to carry. Approximately a third of all of the dam failures that have taken place in the United States since 1874 have happened during the past decade. Our national parks and recreation areas have been terribly neglected and our railroads are a bad joke. Hurricane Katrina showed how vulnerable our levees are, and drinking water systems all over the country are badly outdated. Sadly, at a time when we could use significant new investment in infrastructure, our spending on infrastructure is actually way down. Back during the 50s and the 60s, the U.S. was spending between 3 and 4 percent of GDP on infrastructure. Today, that figure is down to about 2.4 percent. But of course we don’t have any extra money to spend on infrastructure because of our reckless spending and because of the massive amount of debt that we have accumulated. While the Obama administration is spending more than half a million dollars to figure out why chimpanzees throw poop, our national infrastructure is literally falling apart all around us. Once upon a time nobody else on the planet could match our infrastructure, and now we are in the process of becoming a joke to the rest of the world.
The following are 21 facts about America’s failing infrastructure that will blow your mind….
#1 The American Society of Civil Engineers has given America’s crumbling infrastructure an overall grade of D.
#3 It is being projected that Americans will spend an average of 160 hours stuck in traffic annually by the year 2035.
#4 Approximately one-third of all roads in the United States are in substandard condition.
#5 Close to a third of all highway fatalities are due “to substandard road conditions, obsolete road designs, or roadside hazards.”
#6One out of every four bridges in America either carries more traffic than originally intended or is in need of repair.
#7 Repairing all of the bridges in the United States that need repair would take approximately 140 billion dollars.
#8 According to the U.S. Chamber of Commerce, our decaying transportation system costs the U.S. economy about 78 billion dollars annually in lost time and fuel.
#9 All over America, asphalt roads are being ground up and are being replaced with gravel roads because they are cheaper to maintain. The state of South Dakota has transformed over 100 miles of asphalt roads into gravel roads, and 38 out of the 83 counties in the state of Michigan have transformed at least some of their asphalt roads into gravel roads.
#10 There are 4,095 dams in the United States that are at risk of failure. That number has risen by more than 100 percent since 1999.
#11 Of all the dam failures that have happened in the United States since 1874, a third of them have happened during the past decade.
#12Close to half of all U.S. households do not have access to bus or rail transit.
#13 Our aging sewer systems spill more than a trillion gallons of untreated sewage every single year. The cost of cleaning up that sewage each year is estimated to be greater than 50 billion dollars.
#14 It is estimated that rolling blackouts and inefficiencies in the U.S. electrical grid cost the U.S. economy approximately 80 billion dollars a year.
#15 It is being projected that by the year 2020 every single major container port in the United States will be handling at least double the volume that it was originally designed to handle.
#16 All across the United States, conditions at many of our state parks, recreation areas and historic sites are deplorable at best. Some states have backlogs of repair projects that are now over a billion dollars long….
More than a dozen states estimate that their backlogs are at least $100 million. Massachusetts and New York’s are at least $1 billion. Hawaii officials called park conditions “deplorable” in a December report asking for $50 million per year for five years to tackle a $240 million backlog that covers parks, trails and harbors.
#17 Today, the U.S. spends about 2.4 percent of GDP on infrastructure. Meanwhile, China spends about 9 percent of GDP on infrastructure.
#19 China has plans to build 55,000 miles of highways by the year 2020. If all of those roads were put end to end, it would be longer than the total length of the entire U.S. interstate system.
#20 The World Economic Forum ranks U.S. infrastructure 23rd in the world, and we fall a little bit farther behind the rest of the developed world every single day.
#21 It has been projected that it would take 2.2 trillion dollars over the next 5 years just to repair our existing infrastructure. That does not even include a single penny for badly needed new infrastructure.
So where did we go wrong?
Well, one of the big problems is that we have become a very materialistic society that is obsessed with short-term thinking. Investing in infrastructure is something that has long-term benefits, but these days Americans tend to only be focused on what is happening right now and most politicians are only focused on the next election cycle.
Unfortunately, it is probably appropriate that our infrastructure is decaying because we are decaying in just about every other way that it is possible for a society to decay.
We are decaying economically, politically, mentally, emotionally, physically, morally and spiritually.
We are a complete and total mess. So why shouldn’t what is happening to our infrastructure on the outside match what is happening to us as a nation on the inside?
And sadly, we simply do not have the money that we need for infrastructure because of all the debt that we have piled up. The federal government, our state governments and our local governments are all struggling to stay afloat in an ocean of red ink, and unfortunately that means that spending on infrastructure is likely to be cut even more in the years ahead.
So get used to rotting, crumbling, decaying infrastructure. What you see out there right now is only just the beginning.
When news broke of a 2 billion dollar trading loss by JP Morgan, much of the financial world was absolutely stunned. But the truth is that this is just the beginning. This is just a very small preview of what is going to happen when we see the collapse of the worldwide derivatives market. When most Americans think of Wall Street, they think of a bunch of stuffy bankers trading stocks and bonds. But over the past couple of decades it has evolved into much more than that. Today, Wall Street is the biggest casino in the entire world. When the “too big to fail” banks make good bets, they can make a lot of money. When they make bad bets, they can lose a lot of money, and that is exactly what just happened to JP Morgan. Their Chief Investment Office made a series of trades which turned out horribly, and it resulted in a loss of over 2 billion dollars over the past 40 days. But 2 billion dollars is small potatoes compared to the vast size of the global derivatives market. It has been estimated that the the notional value of all the derivatives in the world is somewhere between 600 trillion dollars and 1.5 quadrillion dollars. Nobody really knows the real amount, but when this derivatives bubble finally bursts there is not going to be nearly enough money on the entire planet to fix things.
Sadly, a lot of mainstream news reports are not even using the word “derivatives” when they discuss what just happened at JP Morgan. This morning I listened carefully as one reporter described the 2 billion dollar loss as simply a “bad bet”.
And perhaps that is easier for the American people to understand. JP Morgan made a series of really bad bets and during a conference call last night CEO Jamie Dimon admitted that the strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”.
The funny thing is that JP Morgan is considered to be much more “risk averse” than most other major Wall Street financial institutions are.
So if this kind of stuff is happening at JP Morgan, then what in the world is going on at some of these other places?
That is a really good question.
For those interested in the technical details of the 2 billion dollar loss, an article posted on CNBC described exactly how this loss happened….
The failed hedge likely involved a bet on the flattening of a credit derivative curve, part of the CDX family of investment grade credit indices, said two sources with knowledge of the industry, but not directly involved in the matter. JPMorgan was then caught by sharp moves at the long end of the bet, they said. The CDX index gives traders exposure to credit risk across a range of assets, and gets its value from a basket of individual credit derivatives.
In essence, JP Morgan made a series of bets which turned out very, very badly. This loss was so huge that it even caused members of Congress to take note. The following is from a statement that U.S. Senator Carl Levin issued a few hours after this news first broke….
“The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making.”
Unfortunately, the losses from this trade may not be over yet. In fact, if things go very, very badly the losses could end up being much larger as a recent Zero Hedge article detailed….
Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least “net” is not “gross” and we know, just know, that the SEC will get involved and make sure something like this never happens again.
But what has become abundantly clear is that Wall Street is completely incapable of policing itself. This point was underscored in a recent commentary by Henry Blodget of Business Insider….
Wall Street can’t be trusted to manage—or even correctly assess—its own risks.
This is in part because, time and again, Wall Street has demonstrated that it doesn’t even KNOW what risks it is taking.
In short, Wall Street bankers are just a bunch of kids playing with dynamite.
There are two reasons for this, neither of which boil down to “stupidity.”
The first reason is that the gambling instruments the banks now use are mind-bogglingly complicated.Warren Buffett once described derivatives as “weapons of mass destruction.” And those weapons have gotten a lot more complex in the past few years.
The second reason is that Wall Street’s incentive structure is fundamentally flawed: Bankers get all of the upside for winning bets, and someone else—the government or shareholders—covers the downside.
The second reason is particularly insidious. The worst thing that can happen to a trader who blows a huge bet and demolishes his firm—literally the worst thing—is that he will get fired. Then he will immediately go get a job at a hedge fund and make more than he was making before he blew up the firm.
We never learned one of the basic lessons that we should have learned from the financial crisis of 2008.
Wall Street bankers take huge risks because the risk/reward ratio is all messed up.
If the bankers make huge bets and they win, then they win big.
If the bankers make huge bets and they lose, then the federal government uses taxpayer money to clean up the mess.
Under those kind of conditions, why not bet the farm?
Sadly, most Americans do not even know what derivatives are.
Most Americans have no idea that we are rapidly approaching a horrific derivatives crisis that is going to make 2008 look like a Sunday picnic.
According to the Comptroller of the Currency, the “too big to fail” banks have exposure to derivatives that is absolutely mind blowing. Just check out the following numbers from an official U.S. government report….
JPMorgan Chase – $70.1 Trillion
Citibank – $52.1 Trillion
Bank of America – $50.1 Trillion
Goldman Sachs – $44.2 Trillion
So a 2 billion dollar loss for JP Morgan is nothing compared to their total exposure of over 70 trillion dollars.
Overall, the 9 largest U.S. banks have a total of more than 200 trillion dollars of exposure to derivatives. That is approximately 3 times the size of the entire global economy.
It is hard for the average person on the street to begin to comprehend how immense this derivatives bubble is.
So let’s not make too much out of this 2 billion dollar loss by JP Morgan.
This is just chicken feed.
This is just a preview of coming attractions.
Soon enough the real problems with derivatives will begin, and when that happens it will shake the entire global financial system to the core.
The ratio of government handouts to wages and salaries in the United States is now at an all-time high. According to TrimTabs Investment Research, government handouts have reached a level that is equivalent to 35 percent of all wages and salaries in the United States. Considering the fact that this figure was only 21 percent back in the year 2000 and only 10 percent back in 1960 that is very frightening. The sad truth is that today the American people are more dependent on direct government payments than they ever have been before. What this does is that it takes formerly independent Americans and transforms them into “sheeple” and pets of the government. Today we have tens of millions of Americans that eagerly await the crumbs that the federal government tosses them each month. This is one reason why our national debt is exploding, but our politicians like this system because it enables them to buy votes. Meanwhile, the federal government and the international corporations that dominate our economy have rigged the game so that power and money are becoming increasingly centralized in their hands. As a result of the system that the “big boys” have developed, millions of small businesses across the country are being absolutely crushed, the standard of living of the middle class is gradually being destroyed and more American families slip into poverty ever single day. What we need to do is to dramatically reduce the power of both the federal government and the big corporations so that small businesses and individuals can thrive once again, but instead “activists” such as Michael Moore are out there demanding even more taxes and even more government handouts.
Not that a “safety net” is a bad thing. We simply are not going to allow tens of millions of Americans to starve out in our streets. However, it has gotten to the point where the majority of American families are now dependent on the U.S. government in one form or another and that is very, very wrong.
More government handouts are never a long-term solution to anything. Handouts do not give people dignity. Handouts do not teach people to be independent. Handouts do not enable people to live the “American Dream”. Handouts are not the path to prosperity.
What the American people need are jobs and an environment where small businesses can thrive. But instead, the federal government has allowed the big global corporations to ship millions of our jobs out of the country and the federal government continues to burden our small businesses with an endless array of new taxes and regulations.
Who is successful in America today?
It is the big boys. Everyone else is being crushed.
This is what the founding fathers tried to warn us about. They did not want the federal government to have much power at all, and they were deeply suspicious of large corporations.
But we have turned our backs on the principles of the founding fathers.
We should be figuring out how to get back to the America that our founding fathers originally tried to create, but instead all of the attention is being given to “activists” such as Michael Moore who are calling for even more taxes and even more government handouts. The following video is of Michael Moore giving a speech to protesters in Madison, Wisconsin on March 5th, 2011. His speech was entitled “America Is Not Broke”….
Yes, the “little guy” is being absolutely crushed in America today. But for people like Michael Moore the solution is always to tax the middle class more and to pass out even more government handouts.
That isn’t going to solve anything. Most of the ultra-wealthy have turned avoiding taxes into an art form. A third of all the wealth in the world is now held in “offshore banks“. Many of our largest corporations don’t pay a dime in federal taxes even as they pass out multi-million dollar bonuses to their executives.
Raising taxes in most definitely not the answer. Those that have mastered the art of avoiding taxes will continue to do so no matter how high you raise them.
The truth is that we need to shut down the IRS and scrap the current tax system entirely. It simply does not work.
What we need to do is to get the federal government and the big corporations under control and transfer the power back to the American people.
That is what our founding fathers intended. They intended for the common man to be empowered to start businesses, create wealth and pursue happiness.
But instead tens of millions of Americans have become addicted to government handouts. When large numbers of people give up and willingly become wards of the government that is not good for society.
Unfortunately, more Americans today are dependent on the U.S. government than ever before. Just consider the following statistics….
-According to TrimTabs Investment Research, social welfare benefits in the United States have risen by $514 billion over the past two years alone.
-As 2007 began, only about 26 million Americans were on food stamps, but today over 44 million Americans are now on food stamps.
-Over 50 million Americans are now on Medicaid.
-Back in 1965, only one out of every 50 Americans was on Medicaid. Today, one out of every 6 American is on Medicaid.
-Right now the U.S. government is either writing or guaranteeing well over 90 percent of all mortgages in the United States.
-It is being projected that extended unemployment benefits will cost the federal government $34 billion over the next two years.
-30 U.S. states have borrowed a total of $41.5 billion from the federal government just so that they could continue paying out unemployment benefits during the recession.
-Entitlement programs such as Social Security and Medicare now account for 58% of all U.S. government spending.
But what else should we expect? The federal government has been using a sledgehammer to endlessly pound away on the capacity of small businesses and individuals to create wealth and jobs and opportunities. The business atmosphere in the United States is now so toxic that it is amazing that any small businesses have survived.
Most Americans find themselves with no other way to make a living other than to work for someone else. But the big global corporations have discovered that they can make much larger profits by getting rid of American workers and by shipping our jobs overseas and our politicians are allowing them to get away with it.
The truth is that both political parties don’t have the answers. Neither party seems to have any clue about how to stop millions of jobs from leaving the United States and neither party seems to have any clue about how to create a business environment inside the United States where individuals and small businesses can actually thrive.
How much longer will it be before we all finally admit that we are experiencing total system failure in this country? Should we all just quit trying and sit on our couches waiting for the next government handout? The truth is that there aren’t nearly enough jobs for all Americans anyway.
The middle class is dying and the establishment has us all fighting with each other. The left and the right are busy fighting about taxes and budget cuts while the ultra-wealthy continue to enjoy massive profits and incredibly low taxes in the globalized economic system that we have allowed our politicians to create.
Yes, there are tens of millions of Americans that are deeply suffering right now and they need to be helped.
But government handouts are never a long-term solution to anything. What we need to do is to massively reduce the power of the federal government, massively reduce the power of the big corporations and stop businesses and jobs from being shipped out of the country. We also need to create an environment in the United States that is very favorable to small businesses. That would give our country a chance to start creating good jobs again.
But instead, we continue to allow our politicians to destroy our economy. We actually have 10 percent fewer middle class jobs in this country than we did just ten years ago. The middle class is being systematically destroyed. All of the wealth and all of the power are slowly being transferred into the hands of big government and the big corporations.
The vast majority of the rest of us are being transformed from strong, independent, prosperous Americans into dehumanized sheeple that can’t wait for the next government check to come in.
Does anyone out there actually believe that this is what our founding fathers originally intended?