Warren Buffett WARNS about the thermonuclear financial bomb of over $500 TRILLION in derivatives precipitating Global DepressionSubmitted by nepos libertas on Tue, 03/11/2008 - 12:09
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
~ Thomas Jefferson,
THE DEBATE OVER THE RECHARTER OF THE BANK BILL (1809)
"Every lover of his country will therefore be solicitous to find out some speedy remedy for this alarming evil. There is no possible substitute for the loss of commerce. Our first grand object, therefore, is its restoration. I presume not to dictate or direct. It is a subject that will require the deepest deliberations and researches of the wisest and more experienced men in America to fully comprehend. It probably belongs to no one man existing to possess all the qualifications required to trace the course of American commerce through all intricate paths nor to those and only those that shall lead the United States to future glory and prosperity. I am sanguine in the belief of the possibility that we may one day become a great commercial and flourishing nation.
But if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy. Paper money will invariably operate in the body of politics as spirit liquors on the human body. They prey on the vitals and ultimately destroy them... Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice."
"If ever again our nation stumbles upon unfunded paper, it shall surely be like death to our body politic. This country will crash."
~ General George Washington
Letter to a friend Jabez Bowen, former Deputy Governor & Chief Justice of Rhode Island, Jan. 9, 1787
Borrowed from the source:
John Adams and Thomas Jefferson died on July 4, 1826, the fiftieth anniversary of the Declaration of Independence. Political foes during many of the intervening years, they reconciled in their last years through an extraordinary correspondence, described in part by John Adams in the following letter that reveals their shared views on the subject of paper money (X Works of John Adams, p. 376):
I am old enough to have seen a paper currency annihilated at a blow in Massachusetts, in 1750, and a silver currency taking its place immediately, and supplying every necessity and every convenience. I cannot enlarge upon this subject; it has always been incomprehensible to me, that a people so jealous of their liberty and property as the Americans, should so long have borne impositions with patience and submission, which would have been trampled under foot in the meanest village in Holland, or undergone the fate of Wood's halfpence in Ireland. I beg leave to refer you to a work which Mr. Jefferson has sent me, translated by himself from a French manuscript of the Count Destutt Tracy [French Enlightenment philosopher & aristocrat]. His chapter "of money" contains the sentiments that I have entertained all my lifetime. I will quote only a few lines from the analytical table, page 21. "It is to be desired, that coins had never borne other names than those of their weight, and that the arbitrary denominations, called moneys of account ... had never been used. But when these denominations are admitted and employed in transactions, to diminish the quantity of metal to which they answer, by an alteration of the real coins, is to steal; and it is a theft which even injures him who commits it. A theft of greater magnitude and still more ruinous, is the making of paper money; it is greater, because in this money there is absolutely no real value; it is more ruinous, because, by its gradual depreciation during all the time of its existence, it produces the effect which would be produced by an infinity of successive deteriorations of the coins. All these iniquities are founded on the false idea, that money is but a sign."
Cui bono? Who will benefit from the global economic collapse instigated by the greedy investors?
As always, it's the plutocrat-oligarchic Elite who stand to gain the most while the world, especially America, Great Britain and Japan, lose.
The financial nuclear bomb is about to detonate, as Warren Buffett explains what the excessive accumulation of debts and derivatives (Wikipedia entry on what is a derivative) can do:
Derivatives the new 'ticking bomb' Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen
"Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.
"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.
Also fresh on Buffett's mind: His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street's big shots look like amateurs.
Buffett tried to sell off Gen Re's derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a "financial weapon of mass destruction." That was 2002.
- Derivatives bubble explodes five times bigger in five years -
Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble was fueled by five key economic and political trends:
1. Sarbanes-Oxley increased corporate disclosures and government oversight
2. Federal Reserve's cheap money policies created the subprime-housing boom
3. War budgets burdened the U.S. Treasury and future entitlements programs
4. Trade deficits with China and others destroyed the value of the U.S. dollar
5. Oil and commodity rich nations demanding equity payments rather than debt
In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.
Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.
To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:
U.S. annual gross domestic product is about $15 trillion
U.S. money supply is also about $15 trillion
Current proposed U.S. federal budget is $3 trillion
U.S. government's maximum legal debt is $9 trillion
U.S. mutual fund companies manage about $12 trillion
World's GDPs for all nations is approximately $50 trillion
Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
Total value of the world's real estate is estimated at about $75 trillion
Total value of world's stock and bond markets is more than $100 trillion
BIS valuation of world's derivatives back in 2002 was about $100 trillion
BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion
Moreover, the folks at BIS tell me [the reporter] their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.
Also, keep in mind that while the $516 trillion "notional" value (maximum in case of a meltdown) of the deals is a good measure of the market's size, the 2007 BIS study notes that the $11 trillion "gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets."
- Bubbles, domino effects and the 'bad 2%' -
However, while that may be true as far as the parties to an individual deal, there are broader risks to the world's economies. Remember back in 1998 when LTCM's little $5 billion loss nearly brought down the world's banking system. That "domino effect" is now repeating many times over, straining the world's monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market and the world economy down with it.
This cascading "domino effect" was brilliantly described in "The $300 Trillion Time Bomb: If Buffett can't figure out derivatives, can anybody?" published early last year in Portfolio magazine, a couple months before the subprime meltdown. Columnist Jesse Eisinger's $300 trillion figure came from an earlier study of the derivatives market as it was growing from $100 trillion to $516 trillion over five years. Eisinger concluded:
"There's nothing intrinsically scary about derivatives, except when the bad 2% blow up."
Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a "bad 2% deal" to ignite this $516 trillion weapon of mass destruction.Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It's only a matter of time.