SUICIDE IS PAINLESS (Featured Article)

I have not posted the tables. They'd take too long to load AND if you access the link you will be able to read the important comments.

I found the article and the tables shocking.



16 comments

Posted on 2nd November 2010 by admin in Economy |Politics |Social Issues

tags: Bubbles, home prices, Jeremy Grantham, John Hussman, MASH, Military industrial complex, National Debt, Peak oil, QE2, suicide, Y2K


Everyone has watched one of the best TV series of all-time – M*A*S*H. You also know the tune that played during the opening credits as helicopters delivered wounded soldiers to the 4077 Mobile Army Surgical Unit. Most people have never heard the lyrics that go with the music. The song is Suicide is Painless and the lyrics were sung during the M*A*S*H Movie. As I watched the movie a few weeks ago, the lyrics struck home. Our country has been slowly committing suicide for the last 40 years. The movie and TV series were set during the Korean War. It is fitting that military spending is one of the major causes of our suicide as a nation. On an inflation adjusted basis, the US has doubled spending on Defense since 1962. It is on course to rise another 20% in the next four years. Dwight D. Eisenhower warned us about the military industrial complex in 1961:

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”

The fact that the US currently spends 7 times as much on Defense as the next nearest country is proof that the military industrial complex has gained unwarranted influence and a disastrous rise of misplaced power has occurred.
U.S. DEFENSE SPENDING

File:InflationAdjustedDefenseSpending.

When you critically analyze why we would need to spend 7 times as much as China on military when there is no country on earth that can challenge us, the answer can only be OIL. Our own military came to the following chilling conclusion in their Joint Operating Environment report, issued earlier this year:

By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.

A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is difficult to predict. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest.



The U.S. military knows we are on the verge of an oil crisis. There are no new supplies ready to come on line before 2015. The President and his advisors know that an oil crisis is in our immediate future. We have military bases in Saudi Arabia, Iraq, and Kuwait. We have active fighting forces in Afghanistan and Pakistan. We have a naval armada of aircraft carriers in the Persian Gulf. Our forces completely encircle Iran. Is this a coincidence when the countries with the largest oil reserves in the world are noted?

1. Saudi Arabia – 262 billion barrels
2. Iran – 133 billion barrels
3. Iraq – 112 billion barrels
4. Kuwait – 97 billion barrels

The war on terror is a cover for access to the hundreds of billions of barrels of oil in the Middle East. A 10 million barrel per day shortfall by 2015 would be disastrous for a country that consumes 25% of all the oil in the world. Our hyper-consumer society is like a drug addict, dependent on its oil fix. If we are denied oil for even one day, the withdrawal symptoms would be traumatic and harrowing.

There are 255 million passenger vehicles in the U.S. Our society will collapse within weeks without a sufficient supply of oil. The average American’s only concern about oil is when they get a card in the mail from Jiffy Lube telling them it is time for their 5,000 mile oil change. They stick a hose in their gas tank and fluid pours out, allowing them to motor freely around mall dotted suburbia. Within five years they will be paying over $5 per gallon for this fluid or they will be waiting in lines for three hours to get 10 gallons of that precious fluid. Peak cheap oil has been predictable for decades. The Department of Energy was created 31 years ago. Preparing for peak cheap oil would have required some pain, sacrifice and forethought. But, suicide is painless.
Visions of Things To Be

Through early morning fog I see
visions of the things to be
the pains that are withheld for me
I realize and I can see…

That suicide is painless
It brings on many changes
and I can take or leave it if I please.

Suicide is Painless – M.A.S.H. Movie

As I peer through the fog and attempt to see visions of things to be, I see nothing but pain ahead. Anyone who can look at the following chart and not conclude that there is much pain ahead for this country is either a Goldman Sachs banker, a Federal Reserve Governor, or a bought off politician in Washington DC. It is no coincidence that after Richard Nixon closed the gold window in 1971 and allowed the Federal Reserve to “manage” our economy that total debt outstanding in the US surged from $2 trillion to over $50 trillion. GDP has risen by 1,300% since 1971, while total US debt has risen by 2,600%. Now for the kicker. Real GDP has only gone up by 292% since 1971. This means that 1,000% of the increase in GDP was from Federal Reserve created inflation. Over this same time frame, real wages have declined by 6%, from $318 per week in 1971 to $299 per week today. Inflation has been the American drug of choice to commit suicide over the last 40 years. It is stealthy, seemingly painless, and deadly.

File:US debt outstanding by sector.

Inflation is the “painless” method through which the Federal Reserve has decided this country will commit suicide. It is like turning on the car in the garage and letting the carbon monoxide slowly put you to sleep. The ruling elite are content that the American public is dumbed down by the government run public schools. They count on the fact that 9 out of 10 Americans do not understand inflation. It is an insidious scheme of robbing the working middle class and funneling it to the Wall Street/K Street ruling class. The Federal Reserve has gotten bolder in the last few years as they realized the public doesn’t understand or care what they do. Bernanke has relished in the mainstream media adulation that he saved the world with his printing press in 2008/2009. Even though critical thinkers know for a fact that it was Federal Reserve policies that created the worldwide financial conflagration in the first place, the corporate mainstream media and the Wall Street beneficiaries have been cheerleaders of Easy Al and Helicopter Ben. These men are traitors. They have purposefully impoverished senior citizens and the working middle class in order to enrich their ruling elite masters on Wall Street and in Washington DC.

Ben Bernanke on Wednesday afternoon will announce Quantitative Easing Part Deux. This is a fancy name for Ben printing $1 trillion out of thin air, buying US Treasuries and/or more toxic mortgage securities and artificially lowering interest rates to convince Americans to spend money they don’t have. Jeremy Grantham, in his recent quarterly letter, issues a scathing indictment of Bernanke’s methods:

“For all of us, unfortunately, there is still a further great disadvantage attached to the Fed Manipulated Prices. When rates are artificially low, income is moved away from savers, or holders of government and other debt, toward borrowers. Today, this means less income for retirees and near-retirees with conservative portfolios, and more profit opportunities for the financial industry; hedge funds can leverage cheaply and banks can borrow from the government and lend out at higher prices or even, perish the thought, pay out higher bonuses. This is the problem: there are more retirees and near retirees now than ever before, and they tend to consume all of their investment income. With artificially low rates, their consumption really drops. The offsetting benefits, mainly shown in dramatically recovered financial profits despite low levels of economic activity, flow to a considerable degree to rich individuals with much lower propensities to consume.”

The ruling elite in Washington DC and Wall Street decided that fraud, misinformation and cooking the books was preferable to the pain of honesty, orderly bankruptcy, and assets valued at their true worth. Ben Bernanke ”saved the world” by putting the taxpayer on the hook for $1.5 trillion of toxic mortgage garbage he bought from his masters on Wall Street. John Hussman describes the decision to choose painless suicide over choosing painful medicine to cure our disease:

“Over the short run, two policies have been primarily responsible for successfully kicking the can down the road following the recent financial crisis. The first was the suppression of fair and accurate financial disclosure – specifically FASB suspension of mark-to-market rules – which has allowed financial companies to present balance sheets that are detached from any need to reflect the actual liquidating value of their assets. The second was the de facto grant of the government’s full faith and credit to Fannie Mae and Freddie Mac securities. Now, since standing behind insolvent debt in order to make it whole is strictly an act of fiscal policy, one would think that under the Constitution, it would have been subject to Congressional debate and democratic process. But the Bernanke Fed evidently views democracy as a clumsy extravagance, and so, the Fed accumulated $1.5 trillion in the debt obligations of these insolvent agencies, which effectively forces the public to make those obligations whole, without any actual need for public input on the matter.”

The Only Way to Win is Cheat

The only way to win is cheat
And lay it down before I’m beat
and to another give my seat
for that’s the only painless feat.

That suicide is painless
It brings on many changes
and I can take or leave it if I please.

Suicide is Painless – M.A.S.H. Movie

The Federal Reserve has incessantly created new bubbles every time one of their old bubbles has burst, since the elevation of Alan Greenspan as Fed Chairman in 1987. The bailout of LTCM convinced Wall Street that uncle Al would come to the rescue if their gambles endangered the financial system. Greenspan cheered on the internet revolution and flooded the system for the fake Y2K crisis. When the internet bubble burst in 2000 and the 9/11 attack struck in 2001, Greenspan aided and abetted the greatest bubble in history. He dropped interest rates to historic lows, encouraged the use of adjustable rate mortgages, didn’t enforce bank regulations, and pretended that he couldn’t see the bubble forming. Jeremy Grantham explained the Federal Reserve, Wall Street and K Street conspiracy to avoid the pain of dealing with our long-term structural problems in his latest letter:

“House prices may often not be susceptible to manipulation. Low interest rates may not be enough: they may stimulate hedge fund managers to speculate in stocks, but most ordinary homeowners are not interested in speculating. To stir up enough speculators to move house prices, we needed a series of changes, starting with increasing the percentage of the population that could buy a house. This took ingenuity on two fronts: overstating income and reducing down payment requirements, ideally to nil. This took extremely sloppy loan standards and virtually no data verification. This, in turn, took a warped incentive program that offered great rewards for quantity rather than quality, and a corporation overeager, with aggressive accounting, to book profits immediately. It also needed a much larger, and therefore new, market in which to place these low-grade mortgages. This took ingenious new packages and tranches that made checking the details nearly impossible, even if one wanted to. It took, critically, the Fed Manipulated Prices to drive global rates down. Even more importantly, it needed the global risk premium for everything to hit world record low levels so that suddenly formerly staid European, and even Asian, institutions were reaching for risk to get a few basis points more interest. Such an environment is possible only if there exists an institution with a truly global reach and a commitment to drive asset prices up. In the U.S. Fed, under the Greenspan-Bernanke regime, just such an institution was ready and willing.”

On Wednesday Ben Bernanke will inject more poison into the veins of a once great country. This country, at one time, dealt with its problems in a realistic manner and was willing to sacrifice, cooperate, and make hard choices. QE2 will not help our economy or solve any of our problems.


Is It To Be Or Not To Be?

A brave man once requested me
to answer questions that are key
‘is it to be or not to be’
and I replied ‘oh why ask me?’

‘Cause suicide is painless
it brings on many changes
and I can take or leave it if I please.
…and you can do the same thing if you choose.

Suicide is Painless – M.A.S.H. Movie
The leaders of this country, with the full support of a zombie like disinterested distracted electorate, have chosen to ignore and defer every tough decision regarding energy, spending, entitlements, deficits, and infrastructure. The Federal Reserve has allowed politicians to run the National Debt up to $13.6 Trillion by imposing no limits on the printing of fiat currency backed by nothing but promises. Based on Obama’s 10 year budget projections, adjusted for the real impact of Obamacare and extension of Bush tax cuts, the National Debt will reach $20 trillion in 2015 and $25 trillion by 2019. This is truly a suicide mission. We will never reach these levels because the sweet relief of death will overtake our economic system as the final vestiges of QE2 painlessly bring about the end.



Grantham warns that Bernanke’s actions on Wednesday are a desperate last ditch attempt to fend off the pain of reality. It will fail.

“Thus, our current policy of QE2 is merely the last desperate step of an ineffective plan to stimulate the economy through higher asset prices regardless of any future costs. Continuing QE2 may be an original way of redoing the damage done by the old Smoot-Hawley Tariff hikes of 1930, which helped accelerate a drastic global decline in trade. We may not even need the efforts of some of our dopier Senators to recreate a more traditional tariff war. And all of this stems from the Fed and the failed idea that it can or should interfere with employment levels by interfering with asset prices.”

The only difference between Dr. Bernanke and Dr. Kevorkian is that Kevorkian helped the terminally ill commit suicide. Dr. Bernanke and his colleagues at the Federal Reserve have inflicted suicide on a patient that was healthy and capable of living many more years. The suicide concoction of fiat currency, debt, military empire, and delusion has been painless for those in power, but painful for the working middle class of this country. Dr. Bernanke fancies himself as an expert on the Great Depression. He is destined to be remembered as the man who killed America. Suicide is painless, it brings on many changes.

Dr. Michael Hudson: Dismantle the empire to save it

Save the Economy, Dismantle the Empire

A Grand Global Bargain?

By MICHAEL HUDSON

Today's deepening financial and economic crisis cannot be alleviated without addressing a number of problems that the public does not really want to hear about. Even to cite them raises a wall of cognitive dissonance.

For starters, today's debt problem is not marginal, but has become structural--and structural problems cannot be solved with merely marginal palliatives. What Alan Greenspan called "wealth creation" turned out to be asset-price inflation--bidding up property values and the stock market on credit. The Bubble Economy loaded down households, real estate and entire companies with debt, while the Bush tax cuts for the higher tax brackets forcled to soaring federal, state and local budgets much more deeply into debt.

This policy could continue as long as debt inflated property prices at a faster rate than the interest rate that had to be paid. But paying interest and amortization charges diverted consumer and business spending away from consumption and production. This is what the term "debt deflation" means. The financial and property sectors received the income formerly spent on goods and services. If one has to pay dDebt service is not available to on loans that were issued to bid up real estate and stock prices, this income cannot be spent on consumer goods (for homeowners) or for capital investment (for debt-leveraged companies). The effect iwas to slow sales and business income, and hence the commercial rental and real estate market.

By 2006 a point was reached where debt service grew to exceed operating income or the ability of many homeowners to carry--especially when interest rates jumped. The Fed's bailout idea of bailouts of bad debts is simply to lend debtors enough to pay their bankers and other creditors, subsidizing their insolvency with enough to keep current on obligations theyn cannot otherwise afford. The alternative is negative equity: the sale of homes, office buildings and companies pledged as collateral and sold at prices below the mortgage or bond loan value. Such subsidy merely buys time for the debt problem to become even more deeply engrained.

The reality is that the existing level of debts cannot be paid. The problem is by no means confined to the bottom of the economic pyramid, but is concentrated at the top. The U.S. Government itself turns out to be the world's largest subprime debtor. Its $2.5 trillion debt to foreign central banks--and even larger private-sector debt to other foreigners--cannot be paid, given the nation's heavy military and trade deficits. Recognition of this political fact at the core of the international financial system has led foreign governments and investors to dump dollar-denominated bonds and stock. This has driven down the dollar's exchange rate, raising dollarized prices for oil and other raw materials.

What is ironic is that tThe larger the U.S. trade deficits and foreign military spending have grown, the more of these dollars are turned over to foreign central banks by foreign exporters and other recipients of U.S. funds. Central banks then find themselves with little to spend their money on, except to buy U.S. Treasury securities. They have bought so many that Americans have not had to bear the cost the U.S. federal budget deficit by buying the bonds to finance it. Foreigners have bought themse bonds. This means that, iIn effect, they have loaned the U.S. Government the dollars and foreign exchange to wage its war in the Near East--a war that most foreign voters do not support! To fund the U.S. payments deficit and federal budget deficit is to subsidize this war.

In the last few years, foreign governments have sought some alternative to buying U.S. Treasury bills. But when the Chinese sought to buy Union Oil assets, Congress vetoed the deal, accusing government ownership of leading down the road to serfdom. For China to buy into U.S. privatizations, it would have to believe that the U.S. Congress would let it raise road tolls and other infrastructure access fees by enough to compensate it for the dollar's decline. The more likely response would be new complaints against the Yellow Peril. So foreign governments are finding themselves stuck with dollars they cannot use to buy real U.S. assets, and also cannot buy spend on U.S. exports now that the country is de-industrializing. All they can do is lend money to the U.S. Government.

This is the road that drove the Medici bankers bankrupt a few centuries ago. By 1776, Adam Smith was led to conclude that no government ever had repaid its foreign debt. No private sector has reduced its debt level for long either--except through bankruptcy, moratorium and repudiation. These are the options that face us today. But they are not politically acceptable for public discussion. The last time the economics profession addressed the global debt problem was in the 1920s, in response to the unpayably high level of German reparations and Inter-Ally arms debts to the United States. Since that time there has been much talk of monetary theory, but little attention to measuring the ability of economies to carry their domestic and foreign debt overhead.

This week the Fed tried to reverse the plunge in asset prices by flooding the banking system with $200 billion of credit. Banks were allowed to turn their bad mortgage loans and other loans over to the Federal Reserve at par value (rather at just 20% "mark to market" prices). The Fed's cover story is that this infusion will enable the banks to resume lending to "get the economy moving again." But the banks are using the money to bet against the dollar. They are borrowing from the Fed at a low interest rate, and buying foreign euro-denominated bonds yielding a higher interest rate--and in the process, making a currency gain as the euro rises against dollar-denominated assets. The Fed thus is subsidizing capital flight, exacerbating inflation by making the price of imports (headed by oil and other raw materials) more expensive. These commodities are not more expensive to European buyers, but only to buyers paying in depreciated dollars. (This also squeezes Latin America and other countries in the dollar area.)

The Fed's behavior (not only under Alan Greenspan) raises the question of whether central banks really are necessary. Their idea always has been to sponsor creditor-oriented rules, financial deregulation, and to bail out to the financial sector at public expense, painting the economy into a debt corner. But having done so, the Federal Reserve cannot solve the problems it has created under the Greenspan regime. Its role--and indeed, that of central banks in general--is to pursue precisely the kind of policies that have created today's financial quandary.

Ever since the Bank of England was founded in 1694, central banks throughout the world have represented the interests of the commercial banking system. Unfortunately, the financial time frame always has been short-term. Banks make money by finding more and more clients to borrow funds, while investment bankers and brokerage houses take their commissions and run. Their interest is in promoting a Bubble Economy that will induce real estate buyers and corporate raiders to borrow so as to ride the wave of asset-price inflation. This borrowing seems at first to be self-sustaining as borrowers bid up prices for property, stocks and bonds. These assets then can be pledged as collateral for even larger loans as prices and debts rise together.

This is the kind of "wealth creation" for which Mr. Greenspan sought to take credit. But alas, it is not a process that provides stability for the economy at large. As the financial sector's interests have come to be opposed to those of the "real" economy of consumers and producers, Federal Reserve policy seeks to solve the debt problem with yet more debt, in the form of bailouts to banks that have made bad loans. The bailout is designed to enable banks to lend money to support asset prices and preserve the market price of collateral pledged to back their mortgage loans and lending to highly leveraged companies and hedge funds. In bailing out banks to increase their loans to achieve these ends, the Fed has become an active player in a financial war to indebt real estate, labor and industry all the more.

The result is an unprecedented intrusion of Big Government, not in a socialist manner but one that uses the public purse to proteduct finance and property at the top of the economic pyramid. This is done by leading down a uniquely financial road to serfdom, by promoting a regime of debt peonage. Via the Federal Reserve system, the government is "solving" the ending of the Bubble Economy by providing enough loans to indebt industry and agriculture, labor and tangible capital as it borrows the money to pay debt service on loans that otherwise would fall into default.

But as noted above, the most problematic debt is foreign debt, and the major subprime international debtor is the U.S. Government. It is now indebted to foreign governments (via their central bank holdings of $2.5 trillion in dollar reserves) and to private investors (another few trillion) beyond the nation's ability to pay, not to mention beyond its political willingness to do so. That is why foreigners no longer are accepting the dollars being thrown off by U.S. consumers, U.S. investors buying foreign enterprises, and the U.S. military extending its bases abroad.

And as the dollar falls, import prices rise, headed by fuels and minerals.

Something has to give. How can homeowners and businesses pay their debts, if their operating costs for heating, electricity and transport are absorbing their income?

The only way to stop this hemorrhaging is to negotiate a debt writeoff, starting with the U.S. Treasury bonds held by foreign central banks. But what does the United States have to offer? To ask foreign governments to make an economic sacrifice of this magnitude cannot be negotiated without the U.S. Government negotiating a grand global bargain. Having little quid pro quo to offer, the most promising way to get foreign countries to voluntarily give up their financial claims on the U.S. economy must include the one thing America can offer--the military dimension.

There is only one way that I can see this being done. The United States would agree to dismantle all its overseas military bases (or at least, those outside of the Western Hemisphere). This would mean relinquishing its dream of imposing world hegemony by force of arms. This also would free it--and other countries--from the post-Cold-War arms race. It would help revive the "real" economy's production and consumption by freeing revenue for spending on consumption and new direct investment. In the process it would free the United States from "Pentagon capitalism," that is, cost-plus production contracts that seemingly has led American industrial engineering to be incapable of cost-minimizing production methods, thereby losing what used to be its competitive technological advantage.

Foreign countries are coming to view the United States from the same perspective that the Bush Administration viewed other countries: Any economic potential is by definition military in character. It follows that what COULD be, should be stifled at the outset. The United States has become the world's major aggressive destabilizing force. Without dealing openly with this military "elephant in the room," any alleviation of foreign claims on the U.S. economy by foreign governments would simply permit America to maintain and even to increase its global military presence, building yet more foreign bases and imposing a yet larger balance-of-payments drain on the dollar. "Supporting the dollar" is synonymous with subsidizing the Executive Branch's addiction to hegemonic military diplomacy.

Unfortunately, this is not a truth that the American public wants to hear.

Michael Hudson, a professor of economics at the University of Missouri at Kansas City, was Chief Economic Advisor to the Kucinich-for-President campaign. He is the author of Super Imperialism: The Economic Strategy of American Empire.

Derivatives the new 'ticking bomb'

Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen

By Paul B. Farrell, MarketWatch

Last update: 7:31 p.m. EDT March 10, 2008

ARROYO GRANDE, Calif. (MarketWatch) -- "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 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."

Unfortunately, that "bad 2%" did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was "contained."

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.

World's newest and biggest 'black market'

The fact is, derivatives have become the world's biggest "black market," exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today's slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.

Recently Pimco's bond fund king Bill Gross said "What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't "figure out" the world's $516 trillion derivatives.

Why? Gross says we are creating a new "shadow banking system." Derivatives are now not just risk management tools. As Gross and others see it, the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they're private contracts between two companies or institutions.

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic "shadow banking system" that has become the world's biggest "black market."

That's crucial, folks. Why? Because central banks require reserves like stock brokers require margins, something backing up the transaction. Derivatives don't. They're not "real money." They're paper promises closer to "Monopoly" money than real U.S. dollars.

And it takes place outside normal business channels, out there in the "free market." That's the wonderful world of derivatives, and it's creating a massive bubble that could soon implode.

Comments? Yes, we want to hear your thoughts. Tell us what you think about derivatives: as "financial weapons of mass destruction;" as a "shadow banking system;" as a "black market;" as the next big bubble dangerously exposing us to that unpredictable "bad 2%."

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332 Comments (view all)

Good article. It was about 10 years ago that Nick Guarino of the Wall Street Underground was issuing similar warnings about derivatives. For that reason I'm putting as much of my assets into gold as possible. Derivatives, of course, can work out w...

- TraderTerry

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Very interesting comments, they are too. But BEWARE! If you never traded precious metals before, NOW is not the time to start. And never believe Warren Buffet, he ain't looking out for YOUR interests .. that said, have a read.