From: http://moneymorning.com/2013/09/18/heres-what-1-2-quadrillion-looks-like/ Here's What $1.2 Quadrillion Looks Like Money Morning Staff Reports - September 18th, 2013 The global derivatives market is big. Really big. So big and so unregulated in fact that no one really knows exactly how big it is, but the very best estimates put the notional value at $1.2 quadrillion dollars. That handily beats the entire world's "GDP" of $71.8 trillion. The number is so big that it really defies anything on a human scale. Humans don't do quadrillions of anything at least not usually. Or think of it this way: There are about 2 quadrillion stars in the "El Gordo" cluster, the largest cluster of galaxies we've observed so far. The derivatives market is galactic in scope. Or, consider that there are about 1 quadrillion ants living on Earth. If you put all the ants and all the people into two big piles, they'd be about the same size. $1.2 quadrillion buys every ant on Earth a ride on a crosstown bus. As fun as these things are to think about, this $1.2 quadrillion matter is not to be taken lightly. The derivatives market is largely unregulated. In fact, it's so unregulated that the U.S. Congress, on the advice of investment banks, made it largely illegal to regulate derivatives. The risk in this market is overwhelmingly concentrated in the United States, and it's getting worse. In 2011, a mere four banks held 95.9% of U.S. derivatives. Talk about a bull's-eye. View attachment 34305 ------------------------------------------------------------------------------------------------------------- What is going on here? Is this not going to lead to a global financial crash at some point?
A crash simply because of the size of the derivatives market? No, why would that cause a crash? I assume you believe so because you lack knowledge in regards to what a derivative actually is and what it is used for and more importantly how it is used. It will only lead to another crash if the government decides to make it easier for underprivileged individuals to borrow. It would be nice if people took the time to at least partially understand derivatives, since it seems to be a much talked about issue on these forums. But it's a pretty complex subject and I know most don't have even 1/100 of the prerequisite knowledge to comprehend it.
While the construction of individual derivatives can be complicated, they are basically just debt instruments which are divided up and sold off based on certain criteria. To understand the danger in them you need to understand that they are a debt multiplier. They basically take interest bearing debt, and produce derivative products out of them which is then purchased by investors often using margin. The main issue is that this creates a market for debt in which the purchasers have little knowledge of what they are buying and gives the sellers every incentive to reduce the quality of the debt in order to produce more of it to sell. This is how sub-prime begins to become a problem. Just like during the housing crises, loans begin to be made knowing full well that a large percentage will be defaulted on. http://www.google.com/url?sa=t&rct=...uYG4BQ&usg=AFQjCNE_ANdBFmfucgjABaBO1e1uY6DsaQ At some point when these defaults trigger the same kind of collapse we saw in 2008, they will begin a domino effect in defaults throughout the entire credit markets which the FED will be powerless to stop. They may be able to bail out the banks with the printing press, but that will not help the private economy. In the last crash, the FED was able to cut interest rates by 5% stimulating borrowing and bringing purchasing forward. This time around, that is no longer an option.
No, derivatives are not "basically just debt instruments." You appear to be one of the many people who have very little understanding of what a derivative is. It's nothing more than a contract that is based on some underlying asset. It can be based on some underlying debt, but that's merely one example. There are many possibilities for what the underlying asset can be - a stock, currency, the spread between the price two stocks, the price of wheat, etc. And just to point out - the $1.2 quadrillion figure is just a notional amount. This money doesn't actually exist and it may not be the best figure that describes the value of the market. The real figure is likely enormous itself, but it will only lead to a collapse of the underlying assets or debt decreases substantially in quality. This has more to do with macroeconomic conditions and public policy - just as it did during the 2008 crisis. Also, derivatives (even credit derivatives) don't create a market for debt. The market for debt was huge long before credit derivatives exploded in notional value.
While you are technically right, a derivative can be based on things other than debt, the fact is that the majority of them are products of debt in some form. The reason for that is that debt is the largest single "asset" today. And yes you are correct in saying they do not create the market for debt, the fact is they greatly expand it.
Derivatives are a very general term that encapsulate large and diverse types of financial instruments. Some are heavily regulated, others are presumed to be less risky and rather unregulated. Their total value will always grow, that just makes sense..doesn't it?
well that figure is somewhat exaggerated, it's closer to 20 trillion still a big number but think about it like this, If I take out a mortgage for a 250,000 house and pay it off over 30 years i will have paid closer 700,000 for the house, so the value of my mortgage is 700,000 but my house is only worth 250,000. So if can't my mortgage the bank can seize the house for the 250,000 but if i pay my mortgage than it can use the 700,000 as leverage. then can borrow money using my promise to eventually pay them 700,000 as sort of a form of collateral the only regulations that I think are truly necessary is to bring back the dodd-frank act which was gutted under bush in 2000
No, whats greatly expanding it is the credit expansion efforts by the Fed and the government's policies that have incentivized the use of debt for consumers (when purchasing goods and services) and companies (when financing their businesses.)