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Derivatives Powder Keg Threatens Economy

In sharp contrast to the ‘can-do’ discussions of how best to rescue the economy, this writer Chuck Burr has no illusions. Writing in Culture Change he forecasts a deluge of trillions of losses triggered by Interest Rates Swap trades gone wrong.  Let’s hope he has got his sums wrong.

There is a quadrillion-dollar powder keg sitting at the center of the world financial markets. If the economy keeps on it present course, it will be ignited into a financial supernova. This is the result of the combination of greed and computers — derivatives. Derivatives are financial instruments whose values are derived from something else such as assets or indexes such as interest rates or the stock market. …

Bailouts Are Lighting the Fuse


The Fed and the Treasury are using debt instruments that are being monetized. In other words, creating money out of thin air (U.S. Monetary Base chart). This is immediately very inflationary, and is how the fuse to interest rates swaps is being lit.

Inflation at the wholesale level surged unexpectedly by .8 percent in January well above the 0.2 percent increase that economists had expected.

Take JP Morgan Chase for example, and their $90 trillion derivative portfolio. Let’s say that $50 trillion are in interest rate swaps. If they have even a mere two percent overhang (loss) where they have to pay out variable rates of interest on two percent more of their total interest rate swaps than the portion of swaps on which they are, by contrast, receiving variable rates of interest, they could suffer horrendous losses that could easily put them under. Link to full article

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