DERIVATIVES COULD WRECK WORLD ECONOMY, Cause “Doomsday” for U.S. Dollar, Warns Monetary Expert
Billionaire investor Warren Buffett called them “financial weapons of mass destruction.”
Monetary expert Craig R. Smith likens them to “Doomsday Dollars...waiting to explode” in his new book Crashing the Dollar: How to Survive a Global Currency Collapse.
Yet in a Sunday front page story, The New York Times reports that “Perhaps no business in finance is as profitable today as derivatives. Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy.”
The Times story investigates nine secretive bankers who “share a common goal: to protect the interests of big banks in the vast market for derivatives....instruments which, like insurance, are used to hedge risk.”
These private agreements – called derivatives because their value “derives” from underlying assets such as stocks, bonds or commodities – triggered the September 2008 economic crisis and trillions in government emergency spending to prevent a financial meltdown.
This continuing crisis happened because insurance giant AIG was unable to pay off on hundreds of billions of dollars worth of private backing derivatives called credit default swaps (CDS) it had sold to investors around the world to insure the value of bundles of sub-prime mortgages they had bought.
Today the world's banks, governments and corporations continue to hold as much as $1.28 Quadrillion – more than a million billion dollars – worth of such derivatives, writes Smith, the Chairman of prominent trading corporation Swiss America, in Crashing the Dollar.
“These derivatives are largely unregulated pieces of paper, customized wagers designed to reduce or eliminate risk in buying and selling things such as mortgages and commodities,” says Smith.
“Until these bets are called, nobody can be sure how much or little they are really worth,” says Smith, “yet our entire global financial system now rests on them. What could be riskier?”
“Derivatives are the 'dark matter' of the financial universe,” says Smith, referring to the mysterious invisible stuff that astrophysicists believe makes up 90 percent of our universe.
“If these derivatives again start collapsing on our heads, we could be facing the U.S. Dollar's Doomsday and an American and world economic apocalypse,” warns Smith, “unless individuals and families in large numbers begin taking steps to protect themselves and our nation against this.”
In Crashing the Dollar, Smith estimates that at least $750 trillion worth of derivatives are being held and used by the world's banks to back fractional-lending creation of paper loans of up to $20 for every $1 of derivatives on their books.
This astronomical amount is four times more than America's already-crushing total public debt of nearly $14 Trillion (roughly equal to the entire annual U.S. Gross Domestic Product or GDP); and our total debt owed by all Americans in excess of $50.7 Trillion (nearly the entire world's annual GDP); and America's long-term “unfunded liability” for Social Security and other obligations of more than $120 Trillion – combined.
“$750 Trillion,” writes Smith, “would produce a stack of $1 bills that could reach all the way to the planet Venus, 23.7 million miles away at its nearest orbital point to Earth, and produce a second stack of $1 bills from Venus all the way back to Earth and still have a stack of $1 bills 3.5 million miles high to spare.”
See “A Secretive Banking Elite Rules Trading in Derivatives,” The New York Times, Sunday, December 12, 2010:
To learn about derivatives, see Crashing the Dollar, pages 100-106.
ABOUT YOUR EXPERT GUEST CRAIG R. SMITH:
Craig R. Smith is an author, commentator and popular media guest because he instantly engages audiences with his common-sense analyses of local, national and global trends. Serving as CEO of Swiss America for more than 25 years, Craig understands that Americans want solid answers to the tough questions and that real leadership begins with servanthood. Craig's most recent book is "Crashing the Dollar: How to Survive a Global Currency Collapse."