Comming 600 Trillion Depression

[peacemakr72]

I have read on a subject that I do not understand nor comprehend at all. I have asked several investors and none have any answers. It is concerning the world "DERIVATIVES" market. I dont seem to be able to get a grasp of what they are. It seems they will bring world economy to it's knees shortly however. It is very east to see Federal Govt, State Govt, Municipalities, School districts, Universities trusts, are in a heap of trouble financially.
The following articles predict a collapse soon.... anyone here understand them? They are talking the tune of 600 trillion dollars. 10X World GDP for one year.

http://thecomingdepression.blogspot.com/2010/04/next-bubble-600-trillion.html
http://www.huffingtonpost.com/2010/03/05/derivatives-market-still-_n_487405.html
http://www.matador94.nl/economy/coming-soon-the-600-trillion-derivatives-emergency-meeting
http://www.nakedcapitalism.com/2010...est-rate-derivatives-a-ticking-time-bomb.html

Is any one here more educated on this issue that can shed some light....

 

[jimdana1942]

A mess is a mess is a mess. A hole that no one will be able to climb out of.

 

[stancel]

Everything, and I do mean everything, will ultimately come down to the devaluation of our currency. That is the root of every problem we have. Not swaps, speculators, leveraging or hedging. Unfortunately I believe we are too far along to do much about it. Our unfunded liabilities are mind boggling, and the working middle class could pay 100% of everything they make in taxes and we still wouldn't have enough to fund our future obligations.

The cookie will start to crumble when either, the government defaults on our debts (which I don't think will ever happen), or when they try and monetize it and create a hyper inflationary scenario ending with the destruction of the dollars value. That I believe is less than 10 years away, but we will start feeling the effects of it much sooner.

In my opinion, anybody who has their money in the stock market, or the bond market, is down right crazy. Everything I have is invested in hard assets and commodities. LUCKILY, I had the fore site to see the 2008 down turn and cashed out my 401K about 10 months before the housing market crashed. I had to pay a 10% penalty, but that is peanuts compared to what I would have lost had I left it there.

 

[thatwhichisnt]

Derivatives are a very interesting financial investment tool. There are some legitimate tools for it, however they can be extremely dangeous.

 

[shoalsfugro]

http://www.investopedia.com/articles/stocks/04/122204.asp

 

[bayoutrigger]

Derivatives are financial products which are "derived", that is stem from an underlying contract.

For example, take one mortgage loan with a lender and a borrower. Lets say we take 100 of these mortgage loans and group them together as one package. Then sell the packages to investors. The package is a "derivative" of the underlying basic mortgage loans that make up the package.

But many of the loans in the package have different interest rates and different maturity dates. So companies start selling what are called "interest rate swaps". That is they "bet" they can make money by trading the cash flow from the packaged mortgages with different interest rates for a fixed interest rate paid to the investors. These rate swaps are derivatives of the underlying mortgage and groups of mortgages.

Then, we sell insurance to the purchasers of these packages of mortgage loans to protect them if the loans go bad. Since it's against the insurance laws to sell this type of insurance we instead call the insurance "credit default swaps". The credit default swaps are products derived or stemming from the underlying mortgage loans.

Now, we can slice up these groups of mortgages, sell to investors who also buy interest rate swaps and credit default swaps on their purchases. The sliced up portions of the packages are derivates.

Now these investors can resell and the new purchasers can get interest rate swaps and credit default swaps too. This can go on over and over again.

It is much like having one house that is sold over and over again and each new purchaser buys fire insurance. Each sale and resale of the same house and the new insurance purchased in connection with each purchase are all derivatives of the same house.

Then the house burns. All the investors in the house loose their investment and the insurance companies have to pay multiple claims to everyone who has bought a piece of the house. The house may be insured many times over.

Now multiply the above by just about any other contract you can think of: bonds, loans from pension funds, etc.

Derivatives are nothing more than gambling where the bookies lay off the bets which each other. It's impossible for anybody to win. Everybody is doomed to loose.

 

[mct601]

So it's pretty complicated, but you made sense of it to me. Thanks, never quite new what the derivatives market was