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Strategies & Market Trends : The coming US dollar crisis
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To: NOW who wrote (38830)6/2/2011 1:03:02 PM
From: Real Man1 Recommendation  Read Replies (1) of 71475
 
Systemic collapse. Presumably the severety of deleveraging
is not a function of the notional amounts. rather, use of
derivatives extended the growth of the credit bubble
literally to the sky, as
"the system" loaned money to very risky borrowers through
a big number of counterparties. At the end of that line
an investor bought a garbage AAA loan. When the risky
borrower collapses, so does the whole line that supported him.

What happened? The Fed with his printing press took the last
spot in that line of counterparties, now the bonds are back to being AAA. Fed
has to print to deliver on obligations, but little has
changed: the credit bubble is no longer growing, but it has
not collapsed just yet. In the meantime, the first person
in that line of counterparties is getting more broke because
of rising food and energy prices.

In addion to altering credit ratings on garbage loans
through "more creditworthy" counterparties (such as AIG),
derivatives provide an easy way for speculators to speculate
without the need of getting a loan, which they do. The result
of that is more systemic leverage.
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