Get Ready for Worldwide Currency Devaluation
Wednesday, December 21, 2011
Executive Summary
- The risk of cascading derivatives failures is the “nuclear option” scaring central planners into doing everything in their power to prop up the financial system
- The loss of small investors leaves market prices more vulnerable to the growing percentage of fickle, short-term, “hot money” trading systems
- Removal of China’s ‘deep pockets’ from the EU and US credit markets could easily cause them to seize up
- Why currency devaluation via inflation still seems the likely endgame
- Recommendations for increasing your financial and personal resilience to this outcome
Part I: Worse Than 2008
If you have not yet read Part I, available free to all readers, please click here to read it first.
Part II: Get Ready for Worldwide Currency Devaluation
Derivatives
You’d think that after AIG blew up spectacularly and Lehman choked on a hairball of tangled derivatives (one that is still being picked apart), the lesson would have been learned and derivatives reduced in both size and complexity.
Unfortunately, that lesson was not learned, and we have to square up to the fact that derivatives are now roughly $100 trillion larger in aggregate than they were in 2009:
(Source)
Given the debt circles above, and given the fact that most derivatives are credit default swaps (CDS), I think we can easily appreciate why there wasn’t any appetite for triggering the CDS default provisions on Greek debt. Nobody really knows how that would play out.
But given the perilous state of many of the major banks of the world, along with the explosion of greater derivative amounts and the fact that everybody owes everybody, it is a rock-solid certainty that nobody has the slightest clue what would happen if even one major counter-party failed in the global daisy chain of owers.
One thing that is usually cited with respect to derivatives is that the notional amount is meaningless because it does not reflect the true amount that is at risk. That is, if you and I swap billion-dollar contracts for interest rates that entirely cancel each other out except for a very narrow band where the total possible payout either to you or me might only be for one million dollars, this arrangement would be recorded at the notional amount of $2 billion even though the total credit risk is only $1 million.
by dbworld 
