The $12 Trillion Ticking Time Bomb

Phoenix Capital Research's picture

Time and again, we’ve been told that the Great Crisis of 2008 has ended and that we’re in a recovery.


Indeed, earlier this year, we were even told by Fed Chair Janet Yellen that the Fed may in fact raise interest rates as early as next year.


If this is in fact true, how does one explain the following statement made by the Fed’s favorite Wall Street Journal reporter, Jon Hilsenrath?


One worry: As they move toward a new system, trading in the fed funds market could dry up and make the fed funds rate unstable. That could unsettle $12 trillion worth of derivatives contracts called interest rate swaps that are linked to the fed funds rate, posing problems for people and institutions using these instruments to hedge or trade.


So… the Fed may not be able to raise interest rates because Wall Street has $12 trillion in derivatives that could be affected?


Weren’t derivatives the very items that caused the 2008 Crisis? And wasn’t the problem with derivatives that they were totally unregulated and out of control?


And yet, here we find, that in point of fact, all of us must continue to earn next to nothing on our savings because if the Fed were to raise rates, it might blow up Wall Street again…


Simply incredible and outrageous.


What’s even more astounding is that Hilsenrath is in fact understating the issue here. It’s true that there are $12 trillion worth of derivatives contracts related to the fed funds rate… but total interest rate derivatives contracts are in fact closer to $192 TRILLION.


And that’s just the derivatives sitting on US commercial bank balance sheets. We’re not even including international banks!


So…the US economy is allegedly in recovery… the financial markets are fixed… and all is well in the world. But the Fed cannot risk raising interest rates to normal levels because Wall Street has over $12 trillion (more like over $100 trillion) in derivatives contracts that could blow up.


That sure doesn’t sound like things were fixed to us. If anything, it sounds like the stage is set for another 2008 type disaster.


This concludes this article. If you’re looking for the means of protecting yourself from what’s coming, swing by to pick up a FREE investment report titled Protect Your Portfolio. It outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.


Best Regards


Phoenix Capital Research




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mikecagg's picture

What happens when one side cant pay the other? 

dontgoforit's picture

Breach, default....bankruptcy.  War.

rsnoble's picture

"May raise interest rates as early as next year"

That is a statement that does NOTHING except give FALSE hope and buys TIME.  When next year gets here, if we aren't going to hell with war or whatever, it will be more smooth talking.

We've discussed this before.  "Words" are one of the last bullets the Fed's have left.

disabledvet's picture

Again "the Fed tightened last year."

It was the political classes that blew a gasket...not Wall Street.

So with Bernanke now safely down the Dispose-all I think the hope that somehow "returning to QE 4EVR" resulting in "Wall Street's recovery leading to a renaissance on Main Street as well" is quickly fading.

Never get between a Government and their willingness to sacrifice a recovery to keep interest rates "at or near zero."

There is (de minimus) inflation...but simply put there is not the spread product for Wall Street to truly start betting on a recovery in the USA still...and indeed...look at how the DOLARES are being spent: stock buy backs, huge pay packages, "blockbuster" M&A deals.

Very little in the way of capital is being invested in this for a few areas such as cloud computing, the solar build out and natural gas.

The only big exception has been North Dakota...which of course has a State Bank at it's disposal. "They don't need Wall Street."

bubblemania's picture

Only half of the derivatives can blow up, they other half will make money. There are two sides to every trade. Who writes this shit.

slackrabbit's picture

Not true, you may win (gain) the trade, but if the other counter-parter can't pay (lose) then winning doesn't mean shit!

rsnoble's picture

I'd rather not take my chances with your theory.  There might be two sides but im sure they are not equal.

AdvancingTime's picture

Derivative bets are not a zero sum game and have far reaching consequences in the real world. These are usually lengthy complex legally binding agreements that are very difficult to dissect and often reek with possible contagion. Derivatives fall into many categories from futures, options, credit default swaps, and any complex combinations of these.

They can also be used to wager, bet, and spectate on a market move or direction. Regulation is difficult and spotty at best in that a derivative transaction in one country might be considered a simple spot trade in another. The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. More on these poisonous instruments in the article below.

nofluer's picture

"Derivatives" cannot be treated as interchangable. The purpose of the derivative determines it's value. For example, a currency derivative used to cover the exchange rate of a given value of different currencies in a multinational trade deal is self-disolving when the merchandise is delivered. These are short-life, short-term derivatives, but are often included in the total of ALL derivatives as outstanding debt, even though they are self-liquidating and short term.

As above, due to legal and structural flaws in the transaction models used, Mortgage Backed Securities (Derivatives) have become "non-specific debt" - thus bankster-created currency backed by absolutely nothing. These should not be included in the total of actual derivatives based on goods and on transactions.

Hugh_Jass's picture

I guess that's why we all bought a bunch of gold a long time ago. It matters less if it collapses. Anyone want to start a bank?

are we there yet's picture

What is the exchange rate of German Wymar Republic Douchmarks for Zymbabye bank notes.

nofluer's picture

What is the exchange rate of German Wymar Republic Douchmarks "for Zymbabye bank notes."

It's 1 to 1 to 1 to 1 to 1 to 1 to 1 infinity (and beyond?)

are we there yet's picture

Our whole economy is a giant pump up bra on a congressional drag queen. Nothing is honest or real, or deserving of the real american population that actually make some sort of real product or service outside of the government and its parasites.

RMolineaux's picture

Bankers do not trust each other because each one knows he is lying about his financial condition and assumes the others are doing the same.  For that reason, the federal funds market wil have low volume and volatile rates for the foreseeable future.  While there is still time to do do, I would suggest that those derivative contracts referencing the federal funds rate be re-negotiated to reference the three month Treasury bill instead.

Herdee's picture

Do the math Hilsenrath! How can you possibly be out of touch by hundreds of trillions in the global system of derivatives? Wake up in the back row,Dah.

HardlyZero's picture

No Exit.  The only thing is risk won't be correctly accounted for anymore...investors will be flying blind.

The system will collapse similar to .COM when companies with hollow, zero, or negative revenue were bid to insane values.

Similar to Ancient Rome's Phantom Legions near the end.  There may be a global problem this time.

No exit...and may be at end of the road.

kurt's picture

Class Action Lawsuit?

Savers vs Federal Reserve "Fed"


Wherein it can be proven that policies and actions of the Fed have resulted in a loss of savings interest payments to individual by the artificial, forced reduction of interest rates, the plaintiff sues for forgone income and damages for the duration 2006 to the present. Suit to include retirees forced withdrawl of funds from 401K and the like due to damage to income stream as interest paid is abnormally low. It will be proven that the Fed did not act in the interest of the majority of Americans but rather did, and is continuing to act in the interest of private parties and those with unfair access to income generating streams not available to the general public, ie the "super rich". Suit for breach in feduciary responsibilities, distortion, racketeering and theft. 

Bear's picture

Unfortunately the funds deposited in the Federal Reserve Banking System designated 'Federal Reserve Notes' 'belong' to The System or at least that's what they believe and those who hold the balls control the man and Yellen's got a mighty grip ..... ouch

Monty Burns's picture

But don't all of these derivatives and CFDs etc. represent a zero sum game?  What one party loses the other gains. It's not like a trillion $ worth of buildings got blown up. Why should it create a cataclysm?

El Vaquero's picture

Until one of the counter parties goes out of business and the whole thing seizes up like a motorcycle wheel that just had a steel bar jammed into its spokes.  Oh, and JPM, Citi and BofA have their derivatives shoved into their deposit taking FDIC insured subsidaries.  Even if we had some honest congressmen, they'd still be facing the threat of mutual financial annhilation if they were to go after derivatives.

Bernoulli's picture

"...for another 2008 type disaster..."

I'm not sure if I remember well, but I don't think in 2008 we were talking about hundreds of trillions...

So the 2014 disaster will be by definition ORDERS OR MAGNITUDE worse!!!

andrewp111's picture

In 2008, the Fed and the Treasury panicked when the run began on the money market funds. That was only the prospect of a $5T wipeout. If there is a run on derivatives collateral, you won't know or see any sign of it, and then the payment system suddenly seizes up and shuts down without any public explanation. Checks, credit cards, wire transfers, etc.. - they all stop working. Bank websites all go into "system maintenance" mode. Then the financial earthquake ripples through the world.

DeficitAlchemist's picture

And when it happens we will have to endure chief Bnakster Shil, with his aw shucks charm.. Mr Warren Buffet tell us all along that Derivatives were weapons of mass destruction.. (despite cozing up real close to a few originators to scoop $5 Billion in deal rewards in 2008)

novictim's picture

Capitalism?  What would be the Mises solution to this?  Oh, ya.  Buy gold.

Just how many slices of bread will one be able to purchase with a pound of gold once the shit hits the fan?  

You know, rats eat dead people.  Can someone please ask the Mises folks if investing in rats might be more lucrative?

I'm long on rats.

novictim's picture

"Weren’t derivatives the very items that caused the 2008 Crisis? And wasn’t the problem with derivatives that they were totally unregulated and out of control?"

Shhhhhhh!  Keep it down!  Someone will hear you!!!!  And then it's nail-gun time.

lasvegaspersona's picture

Now that lending has nothing to do with savings what is the problem? The fed just makes new money to lend (big companies only, little guys need not apply) and savings are ground up in the wood chipper and when it comes time to get your savings back they are nominally the same as when you gave them to the bank. As long as everyone is content with getting nothing for the surrender of their productive assets all will be well. Just hope the world does not decide to save in something finite.

MrBoompi's picture

If TPTB stand to lose one penny if interest rates would rise, interests rates will not rise.  And if they do, a bailout would be previously arranged.  Sometimes we forget the true purpose of the Federal Reserve, and it has nothing to do with employment or price stability.

dracos_ghost's picture

So after all the TBTF largesse in the form of TARP,PPIP,TALF, etc etc, these bankers and traders are STILL fucking up and things are looking worse than 2008. Best and brightest my ass.

But wait, at least there is a holgraphic Michael Jackson. Kewl.

I Write Code's picture

Do you have *any* idea what you're talking about?

Loucleve's picture

A good example of manipulation.

For the last 3 months, all we have heard is "rates are going up, rates are going up".

So traders/hedge funds (surprise) go Short, and then get shit squeezed.

Gotta read through the bullshit.

dontgoforit's picture

What value is DERIVED from DERIVATIVES except for those making the trades?  Huh?  What value?

shovelhead's picture

The same value as gambling.

Winners and losers.

All without free drinks.

Georgiabelle's picture

Exactly. It's pretty clear that there is a whole lot of betting going on here. Selling derivatives should be banned except to those who have a legitimate risk to insure.  

lasvegaspersona's picture

Derivatives are the way that the needed expansion of fiat happens. No derivatives and fiat collapses. THAT is why the system needs them. If the world's little people actually did their own savings there would be chaos. Cash would at first be saved and eventually things would be saved. Things like gold in particular (it is what most of the world prefers) would eventually become the preferrfed vehicle and before you know it fiat would look pretty bad and the price of the real things being saved would rocket.

So....if the fiat system is to survive there have to be ways to expand available, non real savings vehicles. Derivatives fill that position for now.

RaceToTheBottom's picture

It is called kicking the can.

Sometimes it is better just to stop kicking the can.  

The pain is gathering exponentially every time you choose to kick again. 

doctor10's picture

I'd be pretty hardpressed to define some specific benefits to the USA of investment banking and investment banks.

The injury list tho is pretty lengthy

JRobby's picture

Look closely at the campaign undertaken by the oligarchs in 1997 to stop any and all regulation of derivative "contracts". It was ruthless.

Notional value to infinity and beyond!

Bemused Observer's picture

I hope it all blows up in their faces, despite all their efforts. And if there is a God out there, I hope we get to see them panic while it's happening. On the air, and at their press conferences...sweaty faces the color of veal, looking like they're about to puke...I want to SEE it!

Fuck you, Wall Street!

cro_maat's picture

Cue margin calls.

pupdog1's picture

In journalism, it is important to clearly distinguish between ads and content.

epobirs's picture

Deriviatives have been blowing up since they were introduced to the first set of suckers. They should simply be outlawed.

nofluer's picture

The MBS's already are outlawed - given that I believe it is illegal for anyone in the US to create currency. MBS's are bank created currency. (As a result of court cases related to the way the mortgaged properties covered by the MBS's were "transfered" the MBS's became "non-specific debt" - which is the definition of currency.)

Stuck on Zero's picture

If you dissolve the top 20 banks and split them into pieces and restart them all notion of derivatives vanishes.


remain calm's picture


J S Bach's picture

The great "reset" commeth.

JRobby's picture

Notional value to infinity!