When I was young and in college we used to ask ourselves rhetorical questions just to show we could think. A favorite was, “What happens when an irresistible force meets an immovable object?” And the answer was, “Immeasurable energy.”
We are about to learn if that thesis is true or not. The irresistible force is the $600 trillion in derivatives. The immovable object is the $60 trillion world economy. Basically a $60 trillion economy cannot support a $600 trillion bucket of used lottery tickets that everyone wants to pretend still have some value. They don’t.
The only real question is just how much actual money is left and I suspect the answer is “near zero.” That’s the ticking time bomb.
I’ve always believed that the growth in derivatives from a low of about $60 trillion in 1997 to its high point of about $800 trillion in 2008 was the foundation stone for credit running totally out of control worldwide.
Brooksley Born famously attempted to regulate the Wild West environment of derivatives in 1997 only to be slapped down in a classic Washington DC turf war led by Alan Greenspan, Larry Summers and Robert Rubin. We are going to rue the day she lost that battle.
In pieces I’ve written since I first began warning 321gold readers about the dangers of derivatives in early 2002, I’ve made the comment a number of times I don’t think there are ten people in the world who really understand derivatives. I’m not kidding. I think next to nobody actually understands this most dangerous of markets.
What is going on in Greece, Spain, Iceland and Ireland is all part of the same ticking time bomb. Some of the events almost defy imagination.
Three relatively small banks in Iceland issued over 50 billion euros in debt that blew up in early October of 2008. The governments of the UK and Holland made local savers in those countries whole and then demanded the citizens of Iceland repay the losses. After two nationwide votes, the citizens of Iceland basically told the UK and Netherlands governments to pound sand. Why should the citizens of Iceland have to repay the losses of the banks? It’s a good question.