As the rhetoric continues in Europe and the United States of a recovery from the spiraling liquidity debt crises in both the central banks and sovereign nations, certain portions of the global market are not only growing, but have added over $100 trillion to the bubble that is the derivatives market.
On Novemeber 26th, the Bureau of International Settlements (BIS) came out with a report on the increase of derivatives during the past six months. These increases show more than $107 trillion has been added to the overall global economy, making the total amount of derivative exposure now surpassing $700 trillion.
While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggestever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world’s financial institutions to the BIS for its semi-annual OTC derivatives report titled “OTC derivatives market activity in the first half of 2011.” – Zerohedge
Derivatives are security and bond insurance policies, or ‘bets’ for or against the collapse of an asset, similar to how one would purchase car insurance to replace a vehicle in the case of complete destruction. The only difference however, is that in the financial world the bet can be made by parties not even involved in the ownership of a given bond or security.
Thus for every security in the world such as a mortgage backed security (MBS), there can be infinate derivatives sold to investors around the world, hedging on the potential default of that security. Taking into consideration that MBS’s are composed of home mortgages, and the value of those properties are still falling four years after the end of the housing bubble, the chances of many derivatives being executed and demanding payment to holders is growing in probability and scope each day.
Most people see only the topical debt liabilities such as the $15 trillion owed by the US government, or the $30 trillion in liabilities held throughout the Eurozone. Yet, these debts pale in comparison to the nearly three quarters of a quadrillion in open and outstanding derivatives that are tied to many of these Eurozone and global debts.
The debt crisis of 2008 brought the concept of derivatives to the forefront of the public eye, and afterwards, the American people called for, and demanded regulations to keep them from creating another disaster in the economic system. However, it appears now that not only have the prior derivatives failed to unwind over the past three years, but instead have increased by more than $100 trillion in the last six months alone, creating a scenario that will utterly destroy the entire global economy should even a small percentage of these ‘bets’ are triggered.