Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: dybdahl who wrote (16010)	1/4/2009 9:08:13 AM
From: Real Man	Read Replies (1) \| Respond to of 71463

* How many derivatives directly cancel out each other. All of them, there is a counterparty to every contract * How many derivatives are the form "We lend you money now and you'll pay us back" None * How many derivatives are of the form "The nominal sum is huge, but the actual money being paid is almost zero" Depends. If there is a default like Leh, 92% or so had to be paid by CDS holders. When rates swaps finally blow up, it will be bleeding like subprime - someone will have to pay a lot every month, possibly 200% of the notional value over the time of 30 years if things really get bad. * How many derivatives can be used as security against something else. Their value can be used as a collateral for a loan. * How many derivatives can fail without affecting anything. None. Derivative failures affect credit spreads and volatility directly, just as they helped to reduce the spreads and volatility while the bubble was inflating.

To: dybdahl who wrote (16010)	1/4/2009 9:40:14 AM
From: Real Man	3 Recommendations Read Replies (1) \| Respond to of 71463

When a counterparty fails, spreads and volatility sky, resulting in amplified systemic loss, such as we have seen during this crisis. For example, a failure of 50 bln. CDS results in a systemic loss of 400 billion or more due to this effect. Liquidity injected by the Fed and their guarantees prevent that natural process from happening. What they are essentially doing is assuming the losing side of a derivative contract when the losing side cannot pay up. They print money to do so. These policies of guaranteed contracts essentially were in effect for the duration of the credit bubble and derivatives bubble, and still are. The Fed has been micromanaging the market since the stock market (internet bubble) blew up in 2000, which is why volatility decreased to below 10. Eventually derivatives grew bigger than that micromanagement and blew up. Since the Ponzi scheme really can't grow to infinity and the Fed remains the guarantor of last resort, the only way it will blow up is through a complete systemic failure, which, in case of the Fed being a guarantor for all obligations, means the currency going to zero as they pay up with printed cash. An alternative, more reasonable, policy would be to let the Ponzi scheme blow up and focus on restoration of the real US economy, rather than Ponzi scheme maintenance as they do now. We'd see big time deflation NOW, thou. They are trying to shift the problem to future generations yet again, while the only real cure is to can that Ponzi scheme instead of guaranteeing it and trying to reinflate it. IMHO.