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The global derivatives market is big. Really big. So big - and so unregulated - in fact that no one really knows exactly how big it is, but the very best estimates put the notional value at $1.2 quadrillion dollars. That handily beats the entire world's "GDP" of $71.8 trillion. The number is so big that it really defies anything on a human scale. Humans don't do quadrillions of anything - at least not usually.
Or think of it this way: There are about 2 quadrillion stars in the "El Gordo" cluster, the largest cluster of galaxies we've observed so far. The derivatives market is galactic in scope.
As fun as these things are to think about, this $1.2 quadrillion matter is not to be taken lightly. The derivatives market is largely unregulated. In fact, it's so unregulated that the U.S. Congress, on the advice of investment banks, made it largely illegal to regulate derivatives.
The risk in this market is overwhelmingly concentrated in the United States, and it's getting worse. In 2011, a mere four banks held 95.9% of U.S. derivatives. Talk about a bull's-eye.
That sa lotta muny
that sa lotta speling mysteaks
"Dividing such a sum equally would give every man, woman, and child alive on Earth today around $169,014 each…"
Your charts are cute but STUPID. Let's deal with REALITY – how much would each citizen in U.S. owe RIGHT NOW to pay that # off? Well, when I divide that 1.2 quadril # by our U.S. population of 311,800,000 (as reported in last census) it equals $384,862,091 – That's MILLIONS owed by every single man, woman and child in the U.S. …and the total is increasing every minute. And we wonder why Congress is reduced to kindergarten playground WHINERS – we don't need a stinkin' BUDGET!! The fan IS coming… guess it's time to start learning Chinese!
Hi Tina,
Just to clarify, the derivatives market is not money "owed" by Americans. That is the National Debt, which is much smaller. The derivatives market is a market similar to the stock market where instruments "derived" from other instruments are "traded". It is not a debt that is owed by Americans. The point of highlighting it's size is to make it clear that there are serious consequences were that market to have trouble.
Tim
It is if it the system fails… It is why we printed 2 trillion in baseless funding and used it to prop up the balance sheets of banks and insurers.
Tina is not bright. A derivative is like a side bet or an insurance policy. Lets say I own a gas station. I'm paying $3.00 per gallon in gas but I'm afraid that the gas prices will go up. So I buy an insurance policy-derivitive that pays the difference if the price of gas goes up.
Derivatives Markets + HFT + Quantum Computing = my lack of faith in humanity the future and all things good
If the derivative market were to collapse, why would the general population have to pay ? Whoever made the bet…they have to pay.
I enjoyed your comment, thanks.
It's a misleading thing to pretend that amount of money in some sense exists. For instance, I could trade a spread in google right now. Suppose google was 1100 a share exactly. I could buy a 1120 call option and sell a 1125 call option and I would perhaps pay 200 dollars if the spread was fair (spread here being difference between bid and ask) – which it wouldn't be – but if it was – I would only have to put down 200 dollars for that, because that is all the money I would stand to lose. If the price stayed below 1120 I would lose my 200 dollars, if the price rose above 1125 and stayed there at expiration I would get back my 200 dollars plus 300 more, if it closed between 1120 and 1125 I would have to unwind my options in the last minute (sell the 1120 call and buy the 1125) and hopefully be paid something between 0 and 500 dollars to do it, but I could end up getting less than the commission I have to pay to the broker and that would suck. But the point is, each of those contracts is for 100 shares of something that goes for 1100 a share. Each of those contracts involves 110 thousand dollars. Depending on how you count it, you could claim I'm slinging around 220 thousand dollars with my 200 dollar investment. But there's no way I'm going to lose that kind of money if things go bad. Worst case scenario, I lose my 200 bucks plus a few more to commissions. At best, I profit 300 bucks. It's essentially a binary option because the 2 strike prices are so close together. But there's no risk of creating 220 thousand dollars worth of havoc with it. All that money doesn't exist. It never did. And it never posed a risk of going horribly ugly. It's just a dumb gamble that isn't worth the 200 bucks plus commissions unless I have a good reason to think google will go up quickly, that's all, it's not the end of the world.
Is this how it works? If so, I can see why people like it. Basically you're risking $200 to make $500. Not a bad deal.
The problem comes when something breaks loose in the system, when enough bets become worthless, and the loss is big enough to AGAIN threaten the existence of the big investment banks who are AGAIN making such humongous bets like they did before the 2008 events. The markets get severely rattled, other investments go down too, and the economy is again on a death dive into the ground. So the banks go to Uncle Sam for a bailout—again—which you know will happen since Uncle Sam is 'owned' by those banks already. The taxpayer is stuck with yet another undeserved bill, the treasury defaults, and it's a very bad situation that ensues for everyone, but the worst gets dumped on those who had nothing to do with all this betting. The banks survive of course, and are "sorry" you can't pay your mortgage anymore because the economy got trashed and you lost your job, but they "regrettably" need to foreclose on your house.
But yes it's true that all that quadrillion doesn't actually exist other than in computers and the minds of people. The fact is, NOTHING HAS CHANGED to avoid another disaster.
One solution to this is to bring back the Glass-Steagall rule that separates consumer banking from precisely this kind of high risk-taking investments. Let people risk all they want, just not with other people's savings or the government as a bailout. The risk then goes squarely to those who take it, a perfectly capitalistic system. There have been efforts to bring back Glass-Steagall, but … who is resisting those sensible changes ? …. just look at those in Congress who rant and scream about fettering financial institutions with regulations. Then look at their campaign contributors: those who deal in derivatives.
If you don't like that, here's on way to do something about it: https://mayone.us
What part of banks being lent money (the Bailout) and paying it all back with a large amount of interest in your mind leaves "taxpayers on the hook"?
In 2012, all of the big banks already had paid back ALL the money with interest.
It was the automakers, AIG (insurance company) and some small banks that had not paid it back. The interest the big banks paid more than covered all of the money the small banks had "borrowed".
http://money.cnn.com/2012/12/19/news/economy/tarp-breaking-even/
Unfortunately, the media continues to not report the truth of the matter so I don't blame you or anyone for not knowing the truth. Fannie Mae and Freddie Mac, the US Postal Service, Medicare, Medicaid…man, talk about black holes or a money pit.
The taxpayers made money on the Bailout (TARP) as far as all the big banks are concerned. It is time to stop complaining about taxpayers being on the hook…because they benefited from the bank bailout.
And where did the money come from to pay it back? It came from newly printed (term of art – not really printed its electronic) money that was provided to the banks specifically so they could then increase the currency (Fractional Reserve Lending at 10-1) so they could then pay it back and keep the "money on their balance sheet to prop up the problem and bury it.
– Quadrillionaireable then yet to wow!
Great explanation. I do bull puts,bull calls and such. My family thinks I'm crazy.but delta says I win.
ZortHarg makes excellent sense of a confusing topic…. If only the bankers and their "junior" executives understood common sense we could all rest easy… Unfortunately as we saw in 2008 that a market this large AND unregulated leaves the potential for gross manipulation, trader error and downright thievery…. What would be the consequences of these all too human frailties? Another bailout of course!…. Right? I mean the Government isn't going to let us all go hungry and fight it out on the streets, is it? Let me tell you, the answer to that question…. The "Government" is also made of humans., who , when push comes to shove, look out only for themselves. The bankers and "Fat Cat" government "Yes " men (like Monsanto's O'bama) have proved over and over they would sell their grandmother for a new pair of Alligator Gucci slippers!!! Honestly it's not that they "would" they "have"… Good luck everybody!
respondents speak with such great clarity and common sense and unfortunately few if any are in the 635 club… plus one?
I have relaxed about this "fear of derivates" alarmism because I have assumed that if you add up the puts and calls they would cancel each other out. So the system is self balancing. Is this good reasoning? If all the derivatives were on one side of the balance sheet it would be different. Not sure how that would happen.
Derivatives are nothing new, however, the incredible amount of them in existence today is a bit of a unique economic situation. Most derivatives that exist currently are essentially some form of interest rate swap. The word derivative comes from the verb derive, as in to take its value from something else. Are derivatives our most pressing economic issue short term, ,no, I certainly do not believe so, but are they absolutely meaningless, unreal, ever so balanced instruments… once again absolutely not… there is the potential for an ever greater economic nightmare than in 2008. See it wasn't just the amount of bad mortgages out there that led to the crash, we could have absorbed that, in real terms it would have been just a bit less severe than the S@L scandal, however, there were over 6 trillion dollars in derivates that derived their value from those mortgages, that is where the news got really ugly. Should interest rates pop again, and quickly, and continue to rise for a long period ( possible! ), another mess could insue even worse tha in 2008. See the problem is all these promise and swaps work fine until the right economic trigger mechanism or industry collapse sends everyone in sell mode almost in unison, then the value of all of them collapses.
it is only printed paper with a certain number on it, so don't stop printing
'Humans don't do a quadrillion of anything'. Not true, the X-ray laser at SLAC — which is peering into the way atoms actually work has a pulse width (duration) of a quadrillionth of a second…and it's getting shorter.
Venus and Earth are not in synchronous alignment (the distance changes).
The taxpayer will make up the differences
Quadrillionaireable then yet to wow!
That’s an insane amount of money, so why don’t we just use the derivatives market to get out of debt?
Much appreciated! I found exactly what I used to be looking for.
You have ended my 4 day lengthy hunt! God Bless you man. Have a great day.