Keep writing, it is good stuff thanks.
In this story I did find a couple things in conflict.
This:
"Morgan Stanley, Citigroup, JPMorgan, Bank of America, and Goldman Sachs — held $185.61 trillions worth of derivatives. That’s a whopping 85% of the global total."
and this:
"Right now, there’s an estimated $1.2 quadrillion worth of financial derivatives floating around in the global financial system"
Can you explain which one is true or how they both could be true.
If those banks hold 85% and it is $186T then 100% is $218T not $1,200T. It the true total is $1,200T and the banks hold $186T then they only only hold 16%.
I think the discrepancy is because they are based on different definitions of "financial derivatives."
I think it is too vague to use the term "financial derivatives" a proper discussion need to use more precise terminology regarding financial instruments.
I have a bit of trouble with the phrase "banks hold" what does that mean? Does that include holdings in clients accounts or does it mean bank assets. They are two very different things. Of course a collapse of either of those kinds of holdings has serious consequences but they would play out differently. Another wrinkle is, are the banks loaning money to the owners of the derivatives using the derivatives a collateral. How do they set the value of those derivatives, are they using the same ratings agencies that screwed it up in the past.
I think you are beating around the bush.
You recognize this "full faith and credit."
Banking and the economy are completely dependent on faith. As long as a critical mass believe everything will be fine. As soon as enough people have a crisis of faith the system collapses.
Trigger that crisis of faith and there will be a stampede to the exit and a resulting crash. A crash causes a domino effect of crashes until something breaks the chain, until one of the firewalls holds.
Leverage is the power to build great wealth but also the tinder to forest fire of correction.
If/when the worst happens there will be bailouts, those are the firewalls of last resort. We never achieved elimination of intuitions that are "too big to fail." If we had then we would not need stress tests. Yes, I think the stress tests are window dressing. Why would you want to pull back that curtain, that could cause a crisis of faith, do you want to cause the crash. Fortunately for you and I we do not influence a critical mass of investors so we can't cause the crash but if we did, if we had the power to reach a critical mass, would you dare speak the truth.
I know why people listen to the Fed but if the Fed's balance sheet is a puny $5T to $10T and those major banks you were talking about as a group hold $186T in just derivatives, isn't the Fed just a bit player and the real power is in those banks. Aren't they really running the worlds economies not the Fed. I mean I believe Jerome Powell over Jamie Dimon but I think Jamie has more power than Jerome and they are both not telling the whole truth.
Just some random numbers. U.S. wealth like $30T, U.S. consumer debt like $14T. Federal Debt like $20T. Total market cap of all U.S. stocks $50T.
If by some measure there’s an estimated $1.2 quadrillion worth of financial derivatives everything on the planet is leverage 10 times over.
TEK
