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The Horrific Derivatives Bubble That Could One Day Destroy The Entire World Financial System

Today there is a horrific derivatives bubble that threatens to destroy not only the U.S. economy but the entire world financial system as well, but unfortunately the vast majority of people do not understand it.  When you say the word "derivatives" to most Americans, they have no idea what you are talking about.  In fact, even most members of the U.S. Congress don't really seem to understand them.  But you don't have to get into all the technicalities to understand the bigger picture.  Basically, derivatives are financial instruments whose value depends upon or is derived from the price of something else.  A derivative has no underlying value of its own.  It is essentially a side bet.  Originally, derivatives were mostly used to hedge risk and to offset the possibility of taking losses.  But today it has gone way, way beyond that.  Today the world financial system has become a gigantic casino where insanely large bets are made on anything and everything that you can possibly imagine. 

The derivatives market is almost entirely unregulated and in recent years it has ballooned to such enormous proportions that it is almost hard to believe.  Today, the worldwide derivatives market is approximately 20 times the size of the entire global economy.

Because derivatives are so unregulated, nobody knows for certain exactly what the total value of all the derivatives worldwide is, but low estimates put it around 600 trillion dollars and high estimates put it at around 1.5 quadrillion dollars. 

Do you know how large one quadrillion is?

Counting at one dollar per second, it would take 32 million years to count to one quadrillion.

If you want to attempt it, you might want to get started right now.

To put that in perspective, the gross domestic product of the United States is only about 14 trillion dollars.

In fact, the total market cap of all major global stock markets is only about 30 trillion dollars.

So when you are talking about 1.5 quadrillion dollars, you are talking about an amount of money that is almost inconceivable.

So what is going to happen when this insanely large derivatives bubble pops?

Well, the truth is that the danger that we face from derivatives is so great that Warren Buffet has called them "financial weapons of mass destruction".

Unfortunately, he is not exaggerating.

It would be hard to understate the financial devastation that we could potentially be facing. 

A number of years back, French President Jacques Chirac referred to derivatives as "financial AIDS".

The reality is that when this bubble pops there won't be enough money in the entire world to fix it.

But ignorance is bliss, and most people simply do not understand these complex financial instruments enough to be worried about them.

Unfortunately, just because most of us do not understand the danger does not mean that the danger has been eliminated.

In a recent column, Dr. Jerome Corsi of WorldNetDaily noted that even many institutional investors have gotten sucked into investing in derivatives without even understanding the incredible risk they were facing....

A key problem with derivatives is that in the attempt to reduce costs or prevent losses, institutional investors typically accepted complex risks that carried little-understood liabilities widely disproportionate to any potential savings the derivatives contract may have initially obtained.

The hedge-fund and derivatives markets are so highly complex and technical that even many top economists and investment-banking professionals don't fully understand them.

Moreover, both the hedge-fund and the derivatives markets are almost totally unregulated, either by the U.S. government or by any other government worldwide.

Most Americans don't realize it, but derivatives played a major role in the financial crisis of 2007 and 2008.

Do you remember how AIG was constantly in the news for a while there?

Well, they weren't in financial trouble because they had written a bunch of bad insurance policies.

What had happened is that a subsidiary of AIG had lost more than $18 billion on Credit Default Swaps (derivatives) it had written, and additional losses from derivatives were on the way which could have caused the complete collapse of the insurance giant.

So the U.S. government stepped in and bailed them out - all at U.S. taxpayer expense of course.

But the AIG incident was actually quite small compared to what could be coming.  The derivatives market has become so monolithic that even a relatively minor imbalance in the global economy could set off a chain reaction that would have devastating consequences. 

In his recent article on derivatives, Webster Tarpley described the central role that derivatives now play in our financial system....

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

But wasn't the financial reform law that Congress just passed supposed to fix all this?

Well, the truth is that you simply cannot "fix" a 1.5 quadrillion dollar problem, but yes, the financial reform law was supposed to put some new restrictions on derivatives.

And initially, there were some somewhat significant reforms contained in the bill.  But after the vast horde of Wall Street lobbyists in Washington got done doing their thing, the derivatives reforms were almost completely and totally neutered.

So the rampant casino gambling continues and everybody on Wall Street is happy.

For now.

One day some event will happen which will cause a sudden shift in world financial markets and trillions of dollars of losses in derivatives will create a tsunami that will bring the entire house of cards down.

All of the money in the world will not be enough to bail out the financial system when that day arrives.

The truth is that we should have never allowed world financial markets to become a giant casino. 

But we did.

Soon enough we will all pay the price, and when that disastrous day comes, most Americans will still not understand what is happening.

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  • caryn verell

    well, i guess there certainly won’t be any money left to bail out this bubble when it finally blows.

  • RedGypsy

    I believe the word you where looking for was AAAAAHHHHHHH!!!!!!!!!

  • David M

    I am trying to better understand these derivatives. Is there a ‘derivatives’ Dow where they are traded? Or are they issued by any and every financial entity? Does someone hold a % of the value of the derivatives. Maybe a simple example of how one of these derivatives sales go down will enlighten us all.

    David M

  • Laurent Idlas

    Honestly I think it is a very good thing that: quote But ignorance is bliss, and most people simply do not understand these complex financial instruments enough to be worried about them.. Unquote.
    This world is so horrendous with so many war criminals around so much social injustice etc etc that if the greed of some can take us to the extinction of our species a bit quicker well I applaud and I have a guess the entire universe will also applaud. My wish is that derivatives bubble grows and grows and grows to be so powerful to destroy not just the world financial system but us with it. We can trust the criminals oops the governments of the world to do just that, unless of course they are in a hurry and opt for the mushroom solution…

  • Mr Carpenter

    Most Americans, Canadians, Swiss, Brits, Germans, South Koreans, Japanese, South Africans and any number of other nationalities don’t know what’s happening, either.

    But ignorance is not bliss.

    May God help us all!

    Perhaps once all the lies, games, gambling and false money collapses and takes the entire world economy with it, that the next generation of people who manage to build something learn a little something and don’t let the monied people run EVERYTHING in future.

    Nah. Won’t happen! Humanity rarely if ever learns from it’s MISTEAKS (sp intentional).

  • BabylonAmerica

    For when they shall say, ‘Peace and safety’ then sudden destruction will come upon them, as travail on a woman with child; and they shall not escape. 1 Thess 5:3

    Like fish taken in a cruel net, Like birds caught in a snare, So the sons of men are snared in an evil time, When it falls suddenly upon them. Ecclesiastes 9:12

    Woe to those who devise iniquity, And work out evil schemes on their beds! At morning light they practice it, Because it is in the power of their hand. They covet fields and take them by violence, Also houses, and seize them. So they oppress a man and his house, A man and his inhertiance. Behold, against this family I am devising disaster, From which you cannot remove your necks; Nor shall you walk haughtily, For this is an evil time. Micah 2:1,2,3

    Those who eat your bread shall lay a trap for you. No one is aware of it. Obadiah 1:8

    A sword is against her treasures, and they will be robbed. A drought is against her waters, and they will be dried up. For it is the land of carved images, And they are insane with their idols. Jeremiah 50:38

    As she has done, so do to her. Cut off the sower from Babylon, And him who handles the sickle at harvest time. Jeremiah 50:16

    O you who dwell by many waters, Abundant in treasures, Your end has come, The measure of your covetousness. The Lord of hosts has sworn by Himself: Surely I will fill you with men, as with locusts, And they shall lift up a shout against you. Jeremiah 51:13

    Will not your creditors rise up suddenly? Will they not awaken who oppress you? And you will become their booty. Because you have plundered many nations, All the remnant of the people shall plunder you, Because of men’s blood And the violence of the land and the city, And of all who dwell in it. Habbakuk 2:7,8

    And he who earns wages, Earns wages to put into a bag full of holes. Haggai 1:6

  • sharonsj

    I am amazed that we still have a derivatives market, but I no longer expect Wall Street to do anything but lie. For those with short memories, we had a derivatives meltdown about 20 years ago. A lot of municipalities and school systems were snookered into investing in derivatives without brokers explaining that derivatives were the equivalent of casino bets. After all, if brokers told the truth, these investors wouldn’t trust them with money.

    The result was that these cities and schools went broke. The taxpayers were saddled with a horrendous debt, but the brokers got rich. Sound familiar? Did Congress or any watchdog institution do anything about the problem? Of course not. They’re in on the fraud.

    I also fault the American people who are stupid, easily led, and more interested in sports and celebrities. Their eyes glaze over the moment the media spends a few minutes covering a serious topic. Maybe the prospect of them and their kids being jobless, homeless, hungry, and a dropout will get them off the couch.

  • Ray

    But rest assured, glenn beck and the tea ******* will blame Obama.

  • http://www.internationalrealestatelistings.com/list_property Taylor White, PHD

    No question this time bomb will explode at some point…the longer people get in the way the worse it will be.

    Get out of the way – let it happen – and lets move on already.

  • lostinmissouri

    This problem should have been addressed in 2008, but instead our Treasury and Federal Reserve, convinced Congress, to throw out 200 years of Law, and bail out the Banksters, Investment firms, Insurance industry, Fanny-Mae, Freddie-Mac,and toss in GM, Chrysler, and who knows how many European banks, at the tune of well over 4 trillion dollars.

    Had the world taken it’s medicine in ’08, we may well be on the road to real recovery by now. All thats happened so far is we have kicked the can down the road, and made the problem bigger!

    It is not “could one day destroy the entire financial system”, it is “will one day destroy the entire financial system”!

    Got Gold?

  • Paul

    I am trying to better understand these derivatives. Is there a ‘derivatives’ Dow where they are traded? Or are they issued by any and every financial entity? Does someone hold a % of the value of the derivatives. Maybe a simple example of how one of these derivatives sales go down will enlighten us all.

    David M

    >> Dave, Well known example. Lets say, you buy a house and took loan from Lehman. Lehman loaned you with 8%. They know you are a risky borrower but they went ahead. Like you, they gave loan to 1000 people and put all the loan money in a basket and sold it to Fredie Mac, or some Soudi or Chinese investor or Goldman. Now goldman think in case if lehman can not pay what should we do. SO they go and take insurance from AIG for that money. (Credit Defaukt Swap). How AIG got money. They sold insurance to customers throught out the world. Now this market is not regulated. Like the way you monitor stocks, bonds, commodities there is no one to monitor. Banks created thi tyoes of derivatives like there is no tomorrow. If you calculate everything, that will be in hundreds of trillion.

    Paul Vocker was asking banks, you have invented these type of financial products (Derivatives) with MBAs from Harvard. Tell me now how these helps US economy. It does not product the economy, rather it kills it.

    Paul

  • Not so Mad Max

    People from Warren Buffet to Alan Greenspan have been complaining about Derivatives for years. Nobody in Washington let alone the people posting here understand how these things affect the world economy. Mister Carpenter is right when or if these things blow they’ll being down the world nobody has the $600 trillion to cover these bets (or at lest I don’t). I’m not sure they ever will bring down the world economy if the number of people world wide who understand these things can be fitted in a 747 how to all the doom and gloomers think they’ll blow.
    I think sovereign debt, and a race to the bottom on wages is a much more direct threat, to our living standards.

  • Dave Cydell

    One of my favorite aubclasses of derivatives are ETFs. I love watching the ETF casino.

  • http://survivaljoe.net/blog/ Survival Joe

    The longer we postpone the financial meltdown (of which 2008 was just a preview), the more it’s going to hurt when it happens.

    Personally, I wish we could just get rid of fiat currencies and finally start building an economy on the foundation of God’s laws.

    -SJ

  • HP

    RE: The Question of David M

    You may take a look at these two videos on YouTube (for example):
    http://www.youtube.com/watch?v=0YNyn1XGyWg

    http://www.youtube.com/watch?v=mzJmTCYmo9g&feature=related

    You can find more of this on http://www.youtube.com by typing in the search box: derivatives explained
    or whatever you guess.

    In few words: The sub-prime derivatives are a financial structure of fraud and deception, providing opportunities to the banks and to the insurance companies to receive shameless bonuses at the expense of driving the world economy to a meltdown.

    Regards

  • http://www.MedicalTourismAmerica.US BillyHewitt

    WMD was discovered in Wall Street with the invention of THE DERIVATIVE that massacred 4 million family homes in 2008 and wiped out 12 countries and closed 137 banks with a $63 TRILLION toxic debt. THE DERIVATIVE was created as a gambling instrument for American bankers and classified as the ultimate WMD (Weapons of Mass Destruction) by American investment banker Warren Buffet. Wall Street is a nest of crooked bankers that invented THE DERIVATIVE that the CBA (Crooked Bankers Association) used like a credit card creating a $150 TRILLION toxic debt. These monsters of capitalism run amok will hide in their bunkers while America collapses. Let’s put these monsters in jail and seize all their assets now.

  • johnny

    The real witches have been found.

    If getting your client to purchase a multi-million dollar financial product that he or she does not fully understand the potential risks of is not a crime that warrants not only the immediate end of all such transactions but also a lengthy jail time for the criminals, our justice system has simply failed to be significant.

    It is clear the banksters are more powerful than our justice system and it’s time for the American people to seek true punishments for these crimes. In the end, we will all suffer. But in order to ensure those who caused what is coming pay for their crimes it is necessary that all investment banks that failed to fully inform clients of the risks associated with these products are locked up. At least then we can stop blaming our ignorant politicians.

    WHEN YOU VOTE, DEMAND THAT YOUR CANDIDATE PUTS BANKSTERS BEHIND BARS

    When a new society arises, I just hope we see the folly in our ways and decide to build a country where people only need government-owned banks to safely HOLD our money and there is no need in society for investors and banks to make money by simply gambling on the rest of us. Profits should only go to those whose LABOR is most valuable, not to those who place bets on the labor of others.

  • walter c lundy

    read matt tabbi’s story of goldman sachs,IN ROLLINGSTONE MAGAZINE startthis.A ALL EMCOMPASSING MONEY BILL WAS PASSED THE LAST DAY OF THE CLINTON REIGE. ALLAN GREENSPAN DIDN’T EVEN UNDER STAND WHAT THEY WERE THEN. NOW HE DOES.GOLDMAN SACHS MADE A KILLING ON OFFERING THESE.

  • http://youstupidrelativist.com/08Ext/00SumExt.html Bill Gaede

    The imminent, inevitable economic collapse implies much more than a breakdown of the global financial system. We are the last generation of humans on Earth!

    http://www.youtube.com/watch?v=rlQrYCacrKo

  • http://www.moneywise24.com Aleks

    Hi David:

    Derivates are traded on various exchanges. If you take options, for example, they are traded on the American Stock Exchange or Boston Option Exchange in the USA, Euronext in Amsterdam, or Eurex in Germany… just to name a few. Some exchanges offer options as well as other products, whereas others offer options only.

    Being Dutch myself, I am not quite sure about the American options exchange system. However, in the Netherlands options can be issued by financial institutions, but also by individuals. However, when buying options, you are not actually getting in touch with the issuer. You can submit an order to the stock exchange, and either you will be buying directly from the issuer through the system (without knowing who the issuer is), or if there is a lack of issuers, the market maker might issue the desired stock option and sell it to you.

    I am not sure, whether Paul’s comment from 10 August really explains derivate trading, or I missed it. Think about offering someone an option to buy a house you don’t possess. If at a later time he decides to buy it (against your expectation of course), you will have to deliver.

    Or you can read the following post on stock options and how leverage effects in pricing is created:

    http://www.moneywise24.com/2009/11/trading-on-the-fast-lane-an-introduction-to-stock-options/

    Still, and in despite of all the negative news, I feel derivates are an enrichment to the investment landscape, either as an insurance or on their own. Derivates do not necessarily mean speculation. Many derivates can be held for years, and act as mid-term investments yet profiting from the leverage. Things go wrong when there is too much speculation and emotion involved, when non-existent items are being sold, and when items are being bought with non-existent money.

    Cheers, Aleks.

  • HP

    RE: ‘I feel derivatives are an enrichment to the investment landscape’ by Aleks

    In the good old days (a decade or so ago), when the larger part of the money was still representing value rather than debt, life was much more simple (and easier). You provide some value to the society and the society pays you (money was delivered directly by the end-user to the provider, with eventually one or two intermediaries, against a commission fee of 2-10%, rarely more).
    Nowadays in a world where 1000 brokers (at least) ‘take the responsibility’ to deliver the money for a given value of a single transaction, the value is lost in time (and in bonuses), and there is nothing left to make the payment with.

    I am not the person to comment who, how, and why turned the world economy into a huge casino, but all we know that the only winner in the casino is the house – and all the others are losers.

    Regards

  • whatthe?

    Derivatives are small potatoes compared to private trading platforms. Multiply the numbers by 10!

  • Truth

    The Truth is that this is a satanic agenda to ultimately bring in a world credit system (world government) whereby you cannot buy or sell without “The Mark of The Beast” – total control of humanity!

  • Gary

    Like a river cleansing itself during a raging storm, so should we have allowed the the economy to cleanse itself too. But we didn’t and now we have to live with it. Is it possible that life will just go on and on and nothing terrible will happen? The words I read here to day are the same written 1,000 years ago.

  • David

    BabylonAmerica

    YOU, AND YOUR KIND ARE INDIGNANT MORONS AND ARE AT THE HEART OF THE ENTIRE WORLDS PROBLEMS.

    SCREAM TO THE HEAVENS;
    PRAY TO YOUR GOD;
    NOTHING WILL SAVE YOU.

    Then there will be peace.

    • Jay Are

      Peace, Yes. But at the expense of my Freedoms? No Damned Way!

  • Irene

    I tried a couple of years ago to talk about the current problem of the derivative market to a man down our road. He owned a piece of lovely wooded land and began “developing” it for lots. Everyone on the road is rated agricultural so this didn’t go down with great glee. I walked down to his site and watched for a time and he came over so we talked about what he planned for the land (wells and septic contamination are a big concern for those of us around such “developments”). When I mentioned the real estate market was on the verge of going down he gave me a very skeptical smirk and we moved on talking about the securities and bonds markets and then I mentioned derivative. Now he is a savy investor (according to him) and obviously had little respect for my opinions and suggestions but the subject of derivatives left him with a blank look.

    So, good luck with getting the average or even above average person to comprehend. In fact, Ben Bernake was in office only a few weeks when the subject was handed to him and he called and called tryin to find someone to explain it to him. Finally, two of the biggest banks had to send in two of their senior-senior bank investor specialists to explain it to the Fed Chairman. Now that is scary!

  • faceinthecrowd

    Nice scare piece – that’s all this will be until we’re provided with some rational basis behind the scare.

    The term ‘derivative’ is so broad, and you paint them all as the cause of the apocalypse, when the ‘derivative bubble pops’.

    OK – what derivatives are you talking about? Mortgages? Commodities? Equities? FOREX? There are many others.

    What bubble are you talking about – every possible derivative?

    What ‘pop’? Every derivative is in a bubble, and they’re all going to ‘pop’ at once, exposing umpteen quadrillions of dollars of liability?

    Anyone with half a brain is asking these questions and not believing this author.

    Doom n Gloom make for nice movies, but isn’t reality.

  • Scott Kuehne

    These derivatives were created to make the scammers rich and help sink national economies to pave the way for world government and currency. I am really flabbergasted that you are playing dumb when some of these bubbles have already burst and the taxpayer footed the bill. It does however illustrate the ignorance of the general public even after the first of these bubbles busted. If you thought the first housing derivative busting was bad, wait until the second round starts. I have a question for you, do you think that derivatives meltdown had an effect on share valuations?

    To answer your question, yes it’s the CDO’s it’s the FX markets traded on margin which is nothing more than a casino operation, it’s commodity contracts which far exceed the actual physical supply of the commodity traded. It’s the equities bought on margin that people cant afford to hold. Equities purchased because the banks balance sheet still has the worthless derivatives on them as if they still had value and the bank looks profitable as a result.

    You can be a part of the problem or a part of the solution. Personally I got out of the derivatives business and am now in gold and silver. That is where the smart money is these days. When gold and silver triple in price AGAIN that will be your sign that the bubble busted.

  • kikinwing

    Okay… So the cycle spun down in housing bringing the derivitive bubble. But what you speak is deirvitive bets on everything!! It would be impossible for the whole market to go bust in one fell shoot as it would be for the entire market to go up 22% in a day!!! Just wont happen. Segments? sure… The whole thing? No way….. Stock food and just wait. History is never written till after the days end.

  • Mikemike….

    Not to be a religious crazy head but it is very obvious that when it does happend that somebody will try to issue in another solution. A solution that will not seem too bad for the world because they will be starving and will lose everything. I’m not a big conspiracy theorist but it is quite interesting to see how throughout history one main agenda has popped its head up in many different ways. My thing is is it is pretty weird but very predictable how us humans work. Most people depend on government to supply their needs and because we live in a world where a lot of things are easy access so considering history of people wanting power and have tried it so many times then just like we regular people are predictable then the powers that be are very predictable as well. It really is a nice set up for the seperation of classes and to issue in a system where everyone can benefit but only in a controlled matter. Thus to me leads us into a vaunerable position that can’t be denied. There was an interview about this derivative stuff I forgot the name but the interviewer asked what the solution would be to this problem, and I heard he simply mentioned a one world economy…

  • Todd K.

    Remember how Y2K was going to destroy everything and the world was inevitably going to melt down when the uncontrollable computer snafu would paralyze modern-day society? That didn’t turn out that way, and this surely won’t either. The world has a lot of extremely intelligent people that come into contact with all these bogus theories and take any action that may be needed to counteract it. Whenever EVERYTHING will come to an end because of “x” (the latest conspiracy theory), you know beyond a shadow of a doubt that the theory is bogus and cannot possibly be true.

    • turtle999

      Yeah, it’ll be fine. That whole meltdown in 2008 caused by derivatives was just in our imagination.

  • John Abrams

    @Todd K, I’m sure the people in finance don’t want this sort of bubble to pop, and are/will take measure to try to prevent this, but remember the 2008 housing crash, would have seemed like a conspiracy theory only a year or two earlier

  • http://testra.com John Hart

    If the World economy were configured correctly non of this would matter but it’s not and there is great danger. Y2K was hyped Microsoft stupidity and like Facebook, not even close to being significant.

    The reason this bubble is so dangerous is the political economic system has impoverished the masses and made them dependent on credit and government trusts with no real value. When it bursts as all bubbles do, credit will vanish, starving the economy of capital, shutting it down.

    The housing bubble was hard enough to paper over, when derivatives burst, everything’s going to come unglued.

    The only solution is to let people keep everything they make until they have sufficient assets to care for themselves and their families.

    List all imbedded taxes in the price of products and return them to those below the threshold of self sufficiency in the form of a credit on their savings.

    Abolish income tax and replace it with a Proportional Asset Tax with thresholds and rates set by Congress to regulate, stimulate and direct the economy. Tax and Spend doesn’t work. Taxes always trickle down onto the backs of the lower class, locking them in poverty, restricting growth and stifling innovation.

    The current system punishes growth (taxes the successful) and rewards stagnation. (no income no taxes)

  • turtle999

    I think it may be time to bring back the guillotine.

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