Unstable Financial Derivatives are a MenacePosted: February 14, 2012
The derivatives towers piercing the stratosphere above the surface of global finance are far less stable than real skyscrapers.
The Bank for International Settlements records that, at September 2011, the total amounts outstanding in exchange-traded and over-the-counter financial derivatives — futures, options and a vast array of sub-categories — totalled over $788 TRILLION.
One of the main ideas behind derivatives is to reduce risk by trying to offset it, but the trading figures point to jerry-built, leaky tower blocks of financial obligations, dwarfing the ‘real’ assets on which the risk offsets have been sought.
$788 trillion is $112,232 for every human alive at 12.55pm GMT today, February 14th 2012. This vast sum is predicated on nothing more than human guesses of likely future risks. The trades are based on mathematical models created by ‘quants’, clever young scientists and mathematicians who make a lot more money in finance than in science or mathematics. Their risk forecasts are always subject to attack by ‘unknown unknowns’, factors that emerge, unbidden, as social, economic and political systems change.
$788 trillion — $788,000,000,000,000 — is an unstable tottering tower that a few little disturbances might topple: a bankruptcy here, a change of government there, an unco-operative citizenry, a commodity price spike. That spike could so easily result from the intensifying struggle for resources that is inevitable given the speed of population growth. When I was at school in the 1960s the world population was 3 billion. Today at 12.55pm GMT it was over 7 billion, 7,021,986,350 to be exact. The Earth is not any bigger. It has vastly more people, inconceivably more financial obligations, but less oil, less coal, less gas, less soil, less fresh water, than it had then.