Speaking of the $490T in global derivatives (please see our article on total gold reserves), this figure came originally from Satyajit Das, the expert in the field of derivatives, who has been featured on this blog several times. In his latest blog post, Satyajit Das comments on how the debt wars have begun:
"Having prevailed against the enemy in ‘the war against terror’, mobile phone usage in public places, road rage etc, the world is now engaged in a battle against debt. Like most modern wars, it is not clear who the enemy is, what our objectives are or what the strategy is but we do have a catchy marketing slogan courtesy of the ‘spin meisters’ – ‘the war against debt’.
Yes, the U.S and other major nations' debt will never be repaid, causing grave consequences to the USD, to savings, and to everyone for generations to come. Now everyone is talking about the debt, and inflation x deflation - and the war against debt may have indeed begun.
Mr. Das also has a very interesting article on Naked Capitalism today about CDOs. He says CDOs' nickname is Chernobyl Death Obligations. He warns that that wild beast of derivatives has not been tamed.
Das says derivatives perform important risk transfer functions within modern capital markets, he calls it "the Dr.Jekyll side of derivatives". However, derivatives "by their inherent nature are also have a Mr. Hyde side. The ability to use derivatives to speculate, create off-balance sheet positions, increase leverage, arbitrage regulatory and tax rules and manufacture exotic risk cocktails will continue to be a major factor in derivative activity." He argues that hedging and risk management are secondary to the other uses. For companies, the ability to trade derivatives to derive additional earnings is "irresistible". For institutional and retail investors, the use of derivatives is now "a vital part of the investment process". For banks, "the Dr. Jekyll of derivative trading is the revenues that can be generated." Always interesting.
Three books that may interest the readers here.
Speaking of the debt wars, Das was actually commenting on the book ‘Collateral Damaged: The Marketing of Consumer Debt to America’, by Charles Geisst, which documents the rise of debt in the U.S. The debt is traced to the 1920s, when the U.S. used to be a nation of savers, to today's world’s largest borrower. ‘
Das also reviews Ásgeir Jónsson’s ‘Why Iceland?’, a book that documents Iceland's collapse.
Jónsson was the CDO of the country’s largest bank before its collapse, and "provides a fascinating insight into how Iceland’s economy was transformed from its fishing and geothermal energy roots into a player in world finance. In the course of this evolution, a nation of 300,00 people created a banking system that had borrowed several times its GDP." Sounds familiar? We know how Iceland's story ended (so far we should, say).
Please see his blog.
Satyajit Das is the author of the famous book on derivatives, Traders, Guns and Money
Covers of the the books mentioned:
Disclaimer: I am absolutely not on commission for any of these books!