As I have written in several previous posts, the most recent report issued by the Bank of International Settlements (the banks’ bank) identified in excess of $500 Trillion Dollars in financial obligations (derivatives) worldwide. These obligations are supported by a global economy that at one point was worth in the region of US$50 Trillion and is now dropping very fast.
So, global GDP is dropping fast but obligations worth easily 10x world GDP are still outstanding at the original value.
Who, you may ask is at the center of this web of derivatives?
“Concentrated, in fact, among a mere handful of financial-services giants. About 80% of the derivative assets and liabilities carried on the balance sheets of 100 companies reviewed by Fitch were held by five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley. Those five banks also account for more than 96% of the companies’ exposure to credit derivatives.”
The Fitch study concerned specifically the US market. However, other than the fact that the US economy makes up 70% of global GDP, I can guarantee that other major banks world wide are into derivatives up to their neck and in a deflationary environment, those obligations are going to come due sooner or later.
The problem of course, is that when the obligations are triggered, the asset base of companies will be greatly reduced in value making servicing those obligations next to impossible.
This is the reason governments in the West have shoveled untold billions into banks coffers.
The more astute observers amongst you will realize that our governments have shoveled “billions” into banks but the obligations run into the “trillions”.
This is where a bit of slight of hand comes to the rescue of government.
Government is supporting the banks in two major ways. On one hand, governments have appropriated public funds and given them to the banks. This was the visible part of government support and the officially sanctioned extent of the involvement of government. On the other hand, governments are allowing banks to disregard a swathe of accounting rules the application of which would render them immediately bankrupt. As banks are allowed to appear solvent, they also retain their investment grade rating.
And here is the slight of hand.
As solvent entities with investment grade rating, banks attract a large portion of institutional money like pension and insurance funds. Thus, the money you think you are paying towards your pension or life insurance for example, is invested by your fund manager in the shares of banks.
Thus, the government shoveled tax payers billions into the coffers of banks and then enabled the banks to attract billions more of taxpayers’ money.
Finding out that governments are also doing secret deals with banks is par for the course. We have a $500 Trillion problem on our hands that we are trying to solve with a few dozen Billions.
Accumulating gold bullion is looking every day better.
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