“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
-Warren Buffet
The rise in OTC derivatives from the low in the 1990’s to north of 650 trillion dollars in 2008 was always a sign of credit run amok and the stupidity of central bankers.
The current notional amount is about $525 trillion.
To put this number in perspective the world GDP is estimated to about 80 trillion. JPMorgan chase has a market cap of $392 billion, BofA has $325 billion, Wells Fargo $314 billion and Citigroup has $204 billion. If even 0.5% of the total OTC derivatives were called upon to perform that would equal 2.6 trillion dollars. It would sink all major world banks. Western world government are going to default. The debt is growing exponential across all of them. Once the imaginary line of confidence is crossed interest rates will sky rocket. Interest payments will consume all of their revenue. Governments will renege on their promises. The OTC derivatives market will be called upon to perform. They will find they all do not have the money at the same time. We don’t know when the confidence barrier will be broken. It could be tomorrow. It could be ten years from now. Moore’s law does not apply to debt markets without a day of reckoning in the future. Things that can not go on forever tend to end. Tick, Tick, Tick….