On Derivatives, Debt and Mervyn King or why John Key will bury this Country in Debt

For some people Derivatives are nothing but a good natured risk management tool. These people have not been paying attention. The current Derivatives bubble of around $ 1.2 quadrillion did not come into being because people wanted to protect themselves against crop failure or other disasters of the natural kind.

It came into being because a very small group of greedy people also known as investment bankers wanted to become hideously wealthy. In order to become wealthy they had to convince the muppets that the paper they bought was a share in something with an underlying asset of real value.

So they bought “tranches” of bundled mortgages, of government bonds they thought were guaranteed by the people with their hard slog. They bought complicated paper instruments which made no sense and which lost money the moment they bought them and shares in silver they thought was stored in big warehouses just waiting for them if they wanted to take possession of it.

And last but not least they bought CDS’s or Collateral Debt Swaps which they were told were a good hedge in case all of their investments went belly up.

The CDS is sold as an insurance but it is not and this is were it all goes South.

The big difference being that when you buy insurance the insurer is legally obliged to have sufficient funds to reimburse you in case of a claim.

No such rules were in place for this newfangled product called the CDS and instead of the normal banking proviso of a leverage of 1:10 our greedy investment bankers leveraged their banks 1:60 or perhaps more.

In fact they went as far as leveraging the entire global GDP 20X!

All of these transactions made by the investment bankers needed to be paid of course and this is usually done in a percentage of the deals bankers close. So on top of the salaries the investment bankers are raking in huge bonuses.

More sales more money. More derivatives, more money. More financial products more sales more money. You see where this is going?

And now we are in a position were even the default of Greece, a country worth 0.4 % of the Global GDP will trigger the avalanche of the 1.2 Quadrillion of Derivatives. Meaning that all those muppets sitting on top of this pile of rubbish will become extremely poor and upset overnight.

Who are those muppets? Well… they are our pension funds for example. They are us too since John Key and Bill English have invested in $ 112 Billion of them. You won’t see them showing up in the books because they are being kept of the books for some reason.

Perhaps that is because according to John Key the bankers must have known in their heart of hearts that they would not get their money back and since it was his bank which came up with the CDS while he was working there he must be feeling more than a little queasy.

At the moment John Key is in England where he will be meeting amongst others Dr Mervyn King the Governor of the bank of England. Dr Mervyn King knows that the jig is up. He also knows that the only way to keep the whole shebang going is to kick the can down the road and the only way that can be done is by making all of us going into more debt so expect that pile of off the book derivatives to grow much… much more but remember, this is not debt caused by us living above our means. This is debt caused by a small group of greedy people not wanting their free ride to stop.

The moment we take back our right to print our own money we can turn this thing around.