G20 Summit must focus on Derivatives, Off-Balance-Sheet Vehicles
8 Bubbles Quadrillion Play Grows 22% to $206k per person-on-planet
London, UK - 19th March 2009, 10:30 GMT
Dear ATCA Open & Philanthropia Friends
[Please note that the views presented by individual contributors
are not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and threats.]
As the April G20 summit in London approaches, it is worth noting that the trans-national play of derivatives has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, ie, +22% worldwide. This is a staggering increase and most of it is seen in the Over-The-Counter (OTC) category as opposed to exchange traded derivatives. As a result, the global size of the derivatives bubble which was calculated last year at USD 190k per person-on-planet, has risen to USD 206k per person-on-planet. The ever rising commitment of governments for the repeated bailouts of financial institutions is partially linked to various flavours of derivatives exposure settlements and “black hole” losses emanating from off-balance-sheet vehicles.
The traditional argument has been to discount derivatives altogether: “On one side of the equation there is a loss, on the other side there is a gain. Nothing disappears. It is just one big shuffle of wealth and assets.” However, if this is the case, why has the US tax-payer had to bail out AIG repeatedly in excess of a hundred and fifty billion dollars so that AIG could settle the Credit Default Swap (CDS) and other derivatives claims of the largest trans-national financial institutions in the world?
In the ATCA briefing, "The Invisible One Quadrillion Dollar Equation" published in September 2008 we discussed the main categories of the quadrillion dollar derivatives market as quoted by the Bank for International Settlements in Basel, Switzerland. Since then the quantum has grown significantly in certain crucial categories and the latest revised numbers follow:
1. Listed credit derivatives stood at USD 542 trillion, about the same as before; however
2. Over-The-Counter (OTC) derivatives stood in notional or face value at USD 863 trillion (UP +44%) and include:
a. Interest Rate Derivatives at about USD 458+ trillion (UP +16%);
b. Credit Default Swaps at about USD 57+ trillion (DOWN -1%);
c. Foreign Exchange Derivatives at about USD 62+ trillion (UP +10%);
d. Commodity Derivatives at about USD 13+ trillion (UP +44%);
e. Equity Linked Derivatives at about USD 10+ trillion (UP +17%); and
f. Unallocated Derivatives at about USD 81+ trillion (UP +14%).
The myth of the single bubble behind The Great Unwind -- manifest as the global credit crunch -- has essentially been dumped in the last few months and subprime mortgage default, a USD 1.5 trillion challenge within the USD 5 trillion mortgage based assets envelope, is seen as a component of a much larger overwhelming global crisis with unprecedented scale, speed, severity and synchronicity.
The global crisis has wiped a staggering USD 50 trillion off the value of financial assets — currency, equity and bond markets worldwide — last year, according to the Asian Development Bank.
The truth that there are as many as "Eight Bubbles" [ATCA] at play and in the process of bursting together is understood to a greater extent now than in the past. We have gone from being able to “rescue the world” with less than USD 1 trillion in October 2008 to USD 11.6 trillion commitments in the US alone along with a further announcement of USD 1.2 trillion of quantitative easing by the US Fed in March 2009. There is a realisation worldwide including the G7 + BRIC + MISSAT that this is a USD 20 trillion problem and growing. As time goes by, the full extent of the collateral damage from the Quadrillion Play and 8 Bubbles burst is being revealed.
The bursting process is taking the form of deleverage on an unprecedented scale. Even 1929 pales in comparison because the industrial production collapse witnessed over five successive years in the 1930s in the US is now taking place in five to six months, most notably in Japan. At a follow on recent ATCA roundtable we posed the following questions for Socratic dialogue:
I. If the Dow Jones Industrial Average has fallen from above 14,000 to below 7,500 as a result of some of the 8 bubbles collapsing, ie a 6,500 points drop or 46% decline, where will the equities market reach by 2010 as other larger bubbles burst?
II. If the world government bond market is around USD 35 trillion, how can governments rescue the eight bubbles bursting step by step with an ever larger quantum and momentum?
III. How can Quantitative Easing (QE) defy the laws of financial gravity without devaluing paper currencies significantly?
IV. What ought to be the focus at the G20 Summit in April to bring about stability in regard to the rising derivatives exposures and use of off-balance-sheet vehicles?
We discussed “Eight Bubbles” in play worldwide in November 2008 and their approximate scale, based on latest information in 2009, is as follows:
1. Subprime Mortgage linked Loans & Assets (USD 1.5 trillion) within Mortgage backed Assets (USD 5 trillion);
2. China, India, Eastern Europe and other Emerging Market Loans (USD 5 trillion);
3. Commodities (Commodity Derivatives at about USD 13 trillion);
4. Corporate bonds (USD 18 trillion);
5. Commercial (USD 22 trillion) and Residential property (USD 45 trillion);
6. Credit Cards Outstanding Debt (USD 4.5 trillion);
7. Currencies (Foreign Exchange Derivatives at about USD 62 trillion); and
8. Credit Default Swaps (USD 57 trillion) as a subset of all Derivatives (USD 1,405 Trillion).
The relative scale of the world's financial engine is as follows:
1. The entire GDP of the US is about USD 14 trillion and falling.
2. The entire US money supply is also about USD 14 trillion with rising Quantitative Easing in trillions.
3. The GDP of the entire world is USD 45 trillion and falling. USD 1,405 trillion is 31 times world GDP.
4. The real estate of the entire world is valued at about USD 65 trillion.
5. The world stock and bond markets are valued at about USD 70 trillion.
6. The trans-national universal model financial institutions own about USD 150 trillion in derivatives.
7. The population of the whole planet is 6.8 billion people. So the derivatives market represents about USD 206,000 per person on the planet.
Assuming a 10% conservative default or decline in asset value, this could be a USD 100 trillion challenge on the base of a Quadrillion. USD 50 trillion of asset decline is already manifest. What are the likely outcomes? "Four Scenarios” have already been suggested by ATCA. We are keen to receive your answers and solutions. Please note that the numbers quoted are a rough guide.
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