Outstanding Derivatives: 1.28 QUADRILLION-95% on MARGIN!

2009
Outstanding Derivatives: 1.28 QUADRILLION-95% on MARGIN!

In an inflationary economy, big numbers quickly lose the shock factor.

Over the course of just a few years, a single banana becomes 10 times more expensive than what a four-bedroom home used to cost. A simple two-ply square of toilet paper sells for $417, while a full roll is priced at more than $140,000. And don’t even torture yourself by guessing how much a gallon of gas can go for under these conditions. The numbers get so big, not only do people stop trying to understand them, they begin to ignore them.

So it is alarming that the latest report from the Bank of International Settlements (bis) went largely unnoticed.

According to the bis, the number of outstanding derivative contracts in the global marketplace soared by double-digit percentages last year. Anything going up by double digits should elicit interest in and of itself, but in this case it is the sheer magnitude of the numbers involved that raises red flags.

The bis reported the total amount of outstanding derivatives has reached a practically incomprehensible $1.28 quadrillion. Yes, you read that correctly—quadrillion! And as astounding as this astronomically huge number is, the actual totals are even bigger because this number does not include derivatives related to the commodity markets (which the bis says it can’t track because values aren’t available).

A quadrillion dollars is hard to wrap your mind around. It takes a thousand trillion to make a quadrillion. Start with 1 million and multiply by 1,000, then multiply by 1,000 again, then multiple by 1,000 yet a gain—and then finally you get to 1 quadrillion. You can think of it as more than 92 times the value of all goods and services produced in America during 2007, or almost 20 times global gross domestic product.
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According to DeMeritt, the majority of the $1.28 quadrillion in derivatives is “owned” on somewhere near 95 percent margin!

That has got to be “one of the scariest phenomena in economic history,” he says.

In case you are wondering, 95 percent margin means that for every dollar speculators have spent betting on derivatives, approximately 95 cents of that money was borrowed. For $5,000, a hedge fund speculator can control $100,000 worth of credit derivatives.
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