What happens if $300 trillion Derivatives Implode? Will we spend part of our coin collection on Brea

oreville

Also, what will happen with the coin hobby?

Will we be selling our extreme rarities for pennies on the dollar? Will extreme deflation occur, even worse than in the Great Depression?

Or will hyperinflation occur in which the extreme rarities will go for big bucks but our currency will be worthless?

Are precious metals the only way to save ourselves?

Could our US government implode?

Will we finally get a smaller government?

Will we once again be selling two apples for a dime? A silver US dime that is?

RichieURich

Are you SuperCarCoins in disguise? What caused all the doom and gloom?

JRocco

The powers that be won't allow that to happen.



Really.

roadrunner

Also, what will happen with the coin hobby?

Will we be selling our extreme rarities for pennies on the dollar? Will extreme deflation occur, even worse than in the Great Depression?

Possibly.

Or will hyperinflation occur in which the extreme rarities will go for big bucks but our currency will be worthless?

Could be.

Are precious metals the only way to save ourselves?

They can't hurt.

Could our US government implode?

Yup. Well at least the dollar.

Will we finally get a smaller government?

Never.

Will we once again be selling two apples for a dime? A silver US dime that is? Hope not.


The govt has no say in what could happen with a MAJOR derivatives meltdown. They've been bailing out the "tiny" companies so far for a billion here or a few billion there. How about when it becomes trillions? No bail out would work at that level. Derivatives have been a huge part of the new paper game that has helped allow the "miracle" equity gains of the 1990's. Considering they were non-existant in 1980 (except for simple futures and other basic contracts), and barely existant in 1990, what will occur in a liquidity crash is hard to determine. Pretty is not what it will be.

roadrunner

1201reset

I hope the "powers that be" (who are they anyway?), don't allow
the $ to devalue to 0, our 401K's couldn't take it.

TwoSides2aCoin

I'm just responding because I'm dumbfounded. I felt that any response is better than just ignoring the thread. I like your posts oreville, but this one is so deep I need scuba gear and a stenographer to answer it. There are absolutely too many variables for me to try and enter meaningful numismatic discussion.

oreville

The responses so far already prove my point.

I do not think anyone really knows what will or could happen!!!

Even the doomsayers who say we will be back on the breadlines can't figure out if we will have hyperinflation or deflation. They try to argue that we could have both.

Oh, cool, my feet in a vat of boiling oil and my head in a bag of dry ice. Overall, I will be at 98.6 degrees and just fine!

Dog97

I dunno. I'm more worried about why 1201reset's icon & post count takes up ½ the width of the screen.

RedTiger

There are always doom and gloomsters. The recent prediction that all the fish in the ocean will be dead by 2048 is more troubling and probably more likely to be true than whatever the original poster was reading.
google search:fish 2048

Lighten up. Nothing will protect you if everything goes to heck, like the entire food chain being destroyed. All the gold and silver and guns and ammo will mean nothing, if 10% of the stuff being predicted by the sky is falling crowd comes to be.

Enjoy life. Be an optimist. Take precautions such as buying insurance and holding some hard assets, but this doom and stuff crowd can't possibly be a happy group.

Take the total view--these are relatively good times, enjoy them while they are here. America as a nation has seen remarkably little hardship during the past 50 years. Read some world history, especially that of other nations and see how blessed this country is.

jpkinla

Oreville,

The liklihood of a severe depression is minimal in my eyes as the government (FED) has the ability to control the money supply and wouldn't allow a liquidity crisis to occur. They CAN stop that.

What scares me is the possibility of a hyperinflationary environment due to the fiscal irresponsibility of our government leaders.

No one wants to face the reality that we are spending beyond our means and have mortgaged our kids' futures to maintain our standard of living. How many plasma TV's do you own? How many cars do you have?

I suspect coins will do well and that bullion is an important part of one's portfolio today. The government has been printing money like crazy to pay for the war, deficit spending and also the balance of trade deficit.

If there is a monetary crisis which is derivative based, the fallout is not known to anyone. Warren Buffett acquired General Re in his Berkshire Hathaway entity and it took months for them to unwind the positions. It is a scary thought if everyone runs for the door at once.

I believe it may be best to own small value bullion type coins like bags of $1000 silver coins or American Eagle gold. Something which is easily recognizable and can be used as currency in the event our dollar becomes less valuable.

Hot topic but one that most do not understand much less can discuss.

Leiana

What are derivatives? Why would they implode?

I have only a rudimentary comprehension of economics.

-Amanda

Dog97

<<<Hot topic but one that most do not understand much less can discuss. >>>

I agree! I always read oreville's threads cause they're interesting but I honestly don't know what a derivative is or what happens when it implodes.

AnkurJ

Life is too short to be thinking about stuff like that.

Live it up, enjoy, and live each day as if it was your last.

Ankur

jpkinla

A derivative is a financial product whose value is generally determined by another financial product. The most recognizable would be options, warrants and futures. The idea is to assign the risk of certain events to others willing to assume that risk. Sometimes, however, an event can occur which distorts the value of the position either because the market loses liquidity, the underlying financial product loses liquidity or both.

The recent debacle with the Amaranth Hedge Fund is a good example. These guys were making a killing trading natural gas and took on a huge position by buying the nearest futures contract and selling one further out. The believed they had minimized their risk by hedging their position. Unfortunately for them the bottom fell out of the natural gas market and everyone wanted out at once. Furthermore, large players KNEW these guys had a huge position which became unsalable. Their derivative position imploded and they sold out at a humongous loss. Right after they sold out the market went back up giving the buyers a huge profit.

Major holders of derivatives include GE Capital, GMAC and Sallie Mae and Freddie Mac. Major derivatives exist in the mortgage market, treasury markets, oil & gas and precious metals/currency markets. With the fact we are now a global economy it is conceivable that our market shakes because some company in China makes a trading error. Fascinating stuff but really scary as no one can predict the fallout of an unforeseen event.

Hope that helps a bit!

cladking

Many of the derivative plays are too complicated for people to understand
and they are traded by computers. This was a problem in 1987 when com-
puters heaped sell orders upon sell orders in order to make some profit in
an esoteric derivative. This has largely been disconnected after that crash
but there are still people making buying and selling decisions based on com-
puters.

The derivatives of themselves probably don't represent a great deal of risk
but they can act as a trigger and they can cause massive disruptions as some
insignificant move can bankrupt major institutions. Long Term Capital Manage-
ment was a huge investment firm brought down by a small increase in gold
prices some years back. Leverage always represents risk and one has to be-
lieve this risk is greatly magnified when people don't understand the ramifica-
tions or mechanics of their activity.

RedTiger

<< <i>What are derivatives? Why would they implode?

I have only a rudimentary comprehension of economics.

-Amanda >>



Derivatives explained at answers.com

In layman's terms there are stocks which traditionally represent ownership in a company, bonds which are debts of companies or governments, and commodities which represent tangible goods such as oil, gold, nickel. Derivatives trade based on the price fluctuations on one of these three asset classes. To strip away all the palaver, derivatives represent a bet on the price movement of stock, a bond, or a commodity (or a basket of these).

Derivatives can implode because of the leverage factor. A person or firm trading derivatives can control much more of an asset than someone trading on a cash basis or even a margin basis.

If a market makes a large unexpected move in one direction, up or down, the resulting margin calls can cause strains on the financial system. There are some checks in place, however, that was also true in 1987, when the world came very close to a financial 1929-type of meltdown. However, the world survived that and a lot of safety valves were put in place because of 1987. My opinion is that it will probably be another 30 or 40 years before those memories fade and we again approach that brink. Or if the fish all dying prediction comes true, about that same time frame of 2048. If the fish all do die, my guess is that not that many people will care too much about derivatives.

It is easy for newsletter writers and Internet columnists to scare people, because of the complexity of the subject. Like I said, there is plenty of other bad news that the media tries to scare everyone about. Even in these relatively good times, there are plenty of chicken littles looking to sell newsletters or make a name for themselves with a sky is falling prediction.

Personally, derivatives are way down on my list of worries.

dlimb2

If it were to implode it would take the world with us...Even with all our debt the world still depends on us to buy buy buy...without us the rest of the world would be mush!...Derivatives ...Like they said we have become a Global World and what happens to one happens to them all...The day The United States looses it's ability to lead and to allow other Nations to prosper. as Long as America keeps the Growing Nations Growing and supplying us with money we won't fall. But if all this Prospering of CHINA and we tell Saudi Arabia we no longer need or want their OIL there is going to be HELL TO PAY! Kinda like Black Mail...and if these two (CHINA and Saudi Arabia become our enemies) Derivatives won't matter! It will be guns and ammo until the last man is standing.

WoodenJefferson

What do 300 trillion derivatives imploding look like?

carry on...

Trime

Oreville,
Have you been brooding about this risk for some time or was this a Saturday evening revelation.
The responses were informative.
No one would quarrel that 300 trillion of derivatives imploding would be one big bang.
This is not the only risk as much of our debt is held by China. If the balance of payments no longer favors China, they would likely unload our relatively weak $.
When these scenerios come to be, hard assets will be better than devalued dollars.
I am less confident that collectables will retain value unless you envision a saudi prince buying your collection?

BlindedByEgo

The only problem is that sleeping on $1000.00 face bags of 90% is so darn uncomfortable...

Dog97

One of the penny stocks I play with when I want a cheap thrill, RMNE did a 20,000/1 rev split & turned into warrants that I could exercise @ 10/1 @ 50% back of closing bid but I didn’t want to put any more $$ into it so $400 worth of my stock just went away plus I ended up with a $40 debit to my account. I guess it imploded.

crito

I'm not particularly worried about derivatives. The market should already have imploded over the way the DTCC was lending out shares to market makers. Yet somehow they just brushed the whole FTD (failure to deliver) problem under the carpet with Regulation SHO.

No wonder Grasso came out like a bandit. The whole operation is a racket.

roadrunner

Failure to deliver is a great scheme for the market makers like JPM and Goldman to help do the dirty work of the ESF and PPT arms of the US Treasury.

Talk about leverage. JPM is the biggest holder of derivatives in the US (world?) controlling some $100 Trillion in derivatives with much less than $1 Trillion in physical assets. The largest percentage of that $100 Trillion is in interest rate contracts. Having a link to the FED and Treasury's interest rate plans certainly is a help to JPM and GS.

The LTCM bust in the late 90's was a tiny blip of only a few billion dollars, yet it shook the foundation of the market. The govt borrows $2 billion a day and has injected hundreds of billions in liquidity into the market in short periods. Yet, trying to hande tens of Trillions in liquidity steps to another level. Since the LTCM fiasco the amount of derivatives has exploded upwards.

The odd thing about derivatives is that many of them are off the balance sheets of companies (not transparent), they are not backed by anything, no one knows who really holds the end of each contract as they are heavily traded into the market, and each side of the transaction is free to value it as they please (no standard regulations for determining value as a rule). Not much different than trading stocks without any regulations of any sort.

I'm with JPK on this one. A hyperinflation is far more likely to occur first. Still, what follows hyperinflation is often depression. Here's a link to John Williams' shadowstats that shows adjusted stats vs govt published stats (CPI 9%/2%, GDP -1.5%/3%). Startiling differences. Note that M3 has been rising since mid-2005. Williams continues to calculate M3 precisely because the FED decided not to. With M2 and M1 falling off one would expect M3 to as well. Problem solved, all is well in the world, sleep tight. Not the case. M3 has picked up the slack for a falling M1/M2. Is this what the FED didn't want the public to see? Liquidity is still being pumped in though not as visible to our eyes. Last I checked that's inflationary, esp if GDP is falling.

Williams' adjusted graphs

roadrunner

fishcooker

Worse yet, what if the depression lasts 60-100 years. No one has enough PM and ammo to make it in that scenario.

dlimb2

In a scenario like this...you would hope that there is someone in Washington who could take control and use a great deal of logic...We have many properties abroad that could be traded for debt...but it would not help the starvation of the US...if we do not get our own Oil fields in production we will one day be at the Mercy of Saudi Arabia and Venezuela and all the Oil Producing Countries of the World...If we do not teach the NEXT GENERATION how to FARM and come up with more economical ways to use energy one day this scenario could play out...They have taught the 3rd World to be self supporting but the UNITED STATES HAS FORGOTTEN THEIR OWN....The Farmer that Farms my land Farms four Counties...this is just one guy...The Farmer is a dying Breed in this Country...and they are the Most important People in our Nation and what has the Government done to them!!!! Without knowing how to farm this country is doomed if something catastrophic was ever to happen.

baddspellar

Much of the discussion on derivatives focuses on their speculative use, leading many to think of them as a fancy form of gambling.

There are, however, many important non-speculative uses of derivatives. Here's a classic example:

Suppose I'm a widget-maker in the US. A buyer in europe awards me a contract, where I am to deliver 1 million widgets in return for 10 million euros, to be delived and paid in 6 months. Widgets are very labor intensive, so my primary costs are denominated in dollars. As a conservative financial manager I will purchase a futures contract (a derivative) to sell 10 million euros in 6 months in exchange for dollars at today's rate. This way I have eliminated currency risk. Essentially, I am now being paid in dollars rahter than euros. I'm a widget-maker, not a currency speculator. I do not want to risk my profits on the chance that the dollar will appreciate or depreciate against the euro. If the other party in the transaction has a similar dollar exposure, this entire derivatives transation has been risk-reducing transaction for both parties.

This is a simple, but commonly used example of "hedging".

Sunnywood

I agree with much of what has been written here. And for several years I have worried that there will be hell to pay. roadrunner, looking at the Williams alternate CPI series and other data is heartening ... I have been screaming about M3 and CPI for a while, and about the excesses in global liquidity and the volatility risks associated with ever-upward-spiraling leverage. So let's ask the simple and obvious question: if inflation is really running at 6-7% (some say 10%), and investments that promise higher returns are either too risky, too leveraged, in a bubble, etc. .... then where do you put your capital to protect its purchasing power?

Let's not all answer "gold" ... which offers no income, and which has performed miserably in real dollars, espeically if you agree with the Williams alternate data series.

So to all of you clever and erudite economists and investors, where do you invest capital to safeguard its long-term purchasing power???

Best,
Sunnywood

MrEureka

What would is look like when the $300 trillion of Derivatives Implode?


If all derivatives in all markets "implode", nobody, not even the Fed, will stand in the way. Many trading firms, large and small, will go bankrupt and it will be over the next morning. I'm more concerned about a scenario in which only a trillion or two goes bad.

dlimb2

"where do you invest capital to safeguard its long-term purchasing power" You buy some land and learn to do a little bit of farming in order to survive...biggest threat would be the food chain...money can not buy food that does not exist!

flaminio

I'm just wondering how 1201reset got such a big icon.

WoodenJefferson

<< <i>I'm just wondering how 1201reset got such a big icon. >>



Because of its smaller size, the Moon's gravity is one-sixth of the Earth's gravity, as we saw demonstrated by the giant leaps of the Apollo astronauts.

1/6th the gravitational pull, hence 6 times larger than our icons.

roadrunner

Andy's scenario of a few trillion at a pop seems more likely than a $50-100 Trillion dollar bust. Interest rate derivatives are probably the largest share of the D market. I would not be worried about the big dogs getting caught on the wrong end of the trade. But it's the smaller firms that are holding tinier pieces of a JPM, GS, etc. trade that I'd be worried about. Refco, Amaranth, who's next?

JPM, GS and others may have been the opposite side of the Amaranth natural gas speculation, and were more than happy to make a few $$ million/billion in the process. Amaranth also had exposure to precious metals and that certainly didn't help the gold situation this past summer if Amaranth had to dump more liquid assets to pay off their natural gas losses.

I think some PM's, gold/silver coins (5-15%) are a good start to balance against the risk of paper assets. Some of the portfolios I've seen to help protect one's assets include hard assets, bear funds (shorting major indices), natural resource stocks, emerging foreign markets in "safe" and growing countries, and in general "things" that everyone needs. I was always impressed by Robert Gordon's slant on this topic (see his articles on financialsense.com) - a steady return in all types of markets.

roadrunner

1201reset

Just like the derivatives being discussed,
my icon takes more space than in the real
world. When the derivatives implode, the icon
will return to normal size.

However, holding real assets will be a hedge
against the USD deflation.

topstuf

What a terrible quesition. Too much doom and gloom. We are the UNITED STATES and immune to anything going wrong. My manager told me so.
Do a "Guess the grade" thread.
We like those.

Sunnywood

1201 reset your icon image just needs to be cropped to reduce the cnavas size down to the size of the actual image, and eliminate the excess blank white canvas ... then it could be re-uploaded and the problem should be solved ...

Sunnywood

lloydmincy

There you guys go again. Do you actually WATCH the news, and even BELIEVE THE PRESS??? What a worthless thread. Face the fact the big wigs regarding money (banks, etc.) run the earth, and you'll be just fine. Trying to reach Nirvana, and one goal for me is to over time not be able to name one politician...

...I am down to about three now. This besides, is OF and should be deleted.

MrEureka

Do you actually WATCH the news, and even BELIEVE THE PRESS???

Lloyd - You don't watch the news or believe the press? OK, fine, I understand that. But what I don't understand is why you would instead read what's on this forum? Are we that much more credible?

lloydmincy

Purely entertainment Andy. Actually, the long threads I never read. Kutasi's and Roadrunner's, the Gold Dreamers - I skip them. Sorry John and Brian, you knew that anyway...

fcloud

I think I will sit home and cower, because I need the government to take care of me. I am helpless without their support!

lloydmincy

<<I think I will sit home and cower, because I need the government to take care of me. I am helpless without their support!>>

Fcloud: Perfect. Thanks for saving me a minute.

ARCO

300 trillion in derivatives? that sounds like much more than currently exists in the combined value of all the buildings, land, savings and anything of human value. Who concocted 300 trillion?

lloydmincy

I don't know ARCO. The press said 300 gagoogleazillion...

pharmer

<< <i>300 trillion in derivatives? that sounds like much more than currently exists in the combined value of all the buildings, land, savings and anything of human value. Who concocted 300 trillion? >>



They call him...Orville

roadrunner

the Gold Dreamers - I skip them. Sorry John and Brian, you knew that anyway...

The gold dreamers are currently +1......and awaiting the next Lucky
Lloyd sweepstakes. We're always ready. Just let us know when.
I sure hate to lose opportunities on the way to $850. Therefore we gold dreamers read EVERY Lloyd thread for said opportunities.



The $300 TRILL in derivatives is not a concocted number. It's gonna be $400 Trillion before you know it as this market is growing closer to exponentially vs. linearly. The $300 Trillion is in leveraged value.
And it takes probably less than 1% to control that amount. Unfortunately when it goes bust, you owe the full amount of the bet. That's what takes the Amaranth's, Enron's, Refco's and others down so quickly. One wrong error or bad assumption in the computer program and down you go. The "whiz kids" running this game have never seen a really battered down stock market. All they know is stocks only go up (1982 and up).

I read an article recently that placed the value of the world and all it's real and paper (leveraged) assets at something like $4,000
Trillion. So there's plenty of potential out there. But only a fraction of that amount is physical and liquid at the same time.

Lucky Sweepstakes part deux

roadrunner

Pentimento

$4.2 trillion in derivatives are traded in Chicago daily. I agree with the 250-300 trillion estimate, although I am not an expert. Usually, the only thing I read in Derivatives Week (magazine) is the cartoon on the cover.

cladking

<< <i>

I read an article recently that placed the value of the world and all it's real and paper (leveraged) assets at something like $4,000
Trillion. So there's plenty of potential out there. But only a fraction of that amount is physical and liquid at the same time.

roadrunner >>




Well, I knew it was coming. That's the first time I've seen quadrillion used outside of the lab.

It shouldn't be all that long until quintillion becomes a viable word.

roadrunner

And then a googleazillion can't be far behind!

roadrunner

WoodenJefferson

<< <i>And then a googleazillion can't be far behind!

roadrunner >>



a few less than googleplexzillion

which is-100/33rd power

that's still a bunch of derivatives

ModernDollarNut

<< <i>And then a googleazillion can't be far behind!

roadrunner >>



Roadrunner, I "don't know much about 'rith-metic" but love "googleazillion". It's perfect, just dial it up, whatever you want, funny numbers totally applicable to the derivatives market.

Actually I do know something about math and I am feeling queasy about the probability that a bit of chaos, sooner or later, will throw the derivatives market into an abrupt spiral of devaluations that have no built in or predictable buffers: think of it as a kind of contageous instantaneous epidemic of implosions.

But, you say, the pros won't let it happen. Right.

Rob

roadrunner

Sorry, I can't take the credit for "googleazillion." That was Lloyd quoting the press, which may or may not be accurate.

If we ever reach googleness, we will be long past chaos.

roadrunner

Connecticoin

Cool, another Voodoo Economics thread!