As the banks go, so does the country. Even when a Communist is in charge of the United States, he must realize that the banks control our fate. A king cannot be king with no subjects and no president wants to oversee a bankrupt and broken country: at least, that is what history has shown us. Too big to fail has never been so big and the crest of the wave must break against the shore at some point. The question has always been when. The logical answer is that we should have already hit the breakers but printing money and “complex” derivative schemes have been extending the economic collapse past its cycle. Of course changing the rules as you please helps the big banks continue along their path with the help of the Federal Reserve. Tim Geithner is culpable also, but when Tim and Ben are side by side, Ben is firmly in control as seen in Congressional hearings.
So what is the purpose of this article? To give some perspective concerning the size of outstanding derivatives. Until the magnitude of the problem can be understood, it will not be addressed. The GDP of the United States is roughly $15 trillion. Multiply the entire output of the country by 15 years and this will give you the size of the outstanding derivative exposure. So what happens IF something does fail in the “Too Big To Fail” mindset of our economic experts? In the case of the United States, if even one bank fails, the government cannot bail them out without debasing the USD to a few pennies (which they have already done since 1913). The contagion will quickly spread to all banks and the dollar will become worth the cost of the linen that it is printed on. Which may be worth something in the future since a nickel costs the government 11 cents to make. If the currency collapses, we can burn it for heat as the Germans did in their Wiemar moment or melt down nickels and sell the metal.
Speaking of metal, gold is once again rebounding as the sound of fiat currency imploding is actually starting to be heard and felt at the gas pump. For all of the politicians and economists telling us how good the economy is, why is the interest rate policy of zero per cent (ZIRP) being maintained indefinitely (until the crisis is over)? Why is QE IV being considered to boost the economy? QE III has come and gone: currency swaps of almost $1 trillion went to “stabilize” the European Central Bank. People love a mystery and the greatest mystery of all is about to unfold when we find out who has been manipulating the world’s economy. Unfortunately we will also be subjected to the consequences of this ending.
Every quarter the Office of the Currency Comptroller releases its report on Bank Derivative Activities, and every quarter we find that the Too Big To Fail get Too Bigger To Fail. To wit: in Q4 2011, of the total $230.8 trillion in US outstanding derivatives, the Top 5 banks (JPM, BofA, Morgan Stanley, Goldman and HSBC) accounted for 95.7% of all Derivatives. In some respects this is good news: in Q2, the Top 5 banks held 95.9% of the $250 trillion in derivatives. Unfortunately it is also bad news, because $220 trillion is more than enough for the world to collapse in a daisy chained failure of bilateral netting (which not even all the central banks in the world can offset). What is the worst news, is that the just released report indicates that in addition to everything else, we have now hit peak delusion, as banks now report to the OCC that a record high 92.2% of gross credit exposure is “bilaterally netted.” While we won’t spend much time on this issue now, it is safe to say that bilateral netting is the biggest lie in modern finance (read How US Banks Are Lying About Their European Exposure; Or How Bilateral Netting Ends With A Bang, Not A Whimper for an explanation of this fraud which was exposed completely in the AIG collapse). And just to put this in global perspective, according to the BIS in the first half of 2011, global derivative gross exposure increased by $107 trillion to a record $707 trillion. It will be quite interesting to get the full year report to see if this acceleration in gross exposure has increased. Because if it has, we will now know that in 2011 European banks were forced up to load up on several hundred trillion in mostly interest rate swap exposure. Which can only mean one thing: when and if central banks lose control of government bond curves, an rates start moving wider again, the global margin call will be unprecedented. Until then we can just delude ourselves that central planners have everything under control, have everything under control, have everything under control.