Friday, 1 February 2008
from meltdown101 26 October 2008 The flight of capital to the dollar has been churning along at breakneck speed over the last week, taking down other currencies with the sole exception of the Japanese Yen. Investors are running home to Mama while waiting to start the Musical chairs again next week and hoping to find one when the music stops. The Yen is now being seen as a safe currency along with the dollar because nearly every other currency is either totally destroyed or on the way to being so. The kicker for the Japanese is that now, they have just priced themselves out of their already severely crashed exports market. Investors and governments alike are seeking a cliff ledge to hang on to as all around them is headed to the bottom, which is a long way off yet. Here we have that word again, and it cannot be repeated too often, Derivatives! The Bank of International Settlements latest figures indicate a total of $512 trillion dollars in nominal outstanding derivatives in all sectors. Breaking it down we have: $393 trillion in Interest rate derivatives $58 trillion in Credit default swaps $56 trillion in currency derivatives $71 trillion in UNALLOCATED derivatives To put this into perspective, $14 Trillion is the total GSP of the U.S. No wonder the panic has set in, everybody knows what is on the horizon but nobody really wants to talk about it. The flight to the dollar is primarily because of the Dollar denomination of the Derivatives market; if you are going to try and unwind your exposure, you need to have dollars in hand to do it. Dollars are still the currency of world trade in Oil and other commodities so everyone needs to have cash in hand even for the dramatically reduced trade volume that we are seeing right now. US Treasuries are about the most popular "safe" haven investment right now. This has caught nearly every financial analyst off guard. Stunned is the word actually. How could anyone want to put their eggs in Uncle Sam's basket? Was it not Uncle Sam that unleashed this storm on the world? Right now, nobody seems to be caring about economic fundamentals as the investing community has turned in to a herd of Wildebeest in the Lion's Den. But , once all of that toxic paper comes home to roost and institutions are falling apart at breakneck speed and the whirlwind unleashed by the Derivatives payback starts to calm down, then it will be time to look around to see who is left standing. The US cannot as it has no basic soundness whatsoever in it's economic model; just a nation that has consumed more than it could chew and never gave anything back in return except for more debt. China's export driven rise to economic power will have dried up, India will be reduced back to what it was before the outsourcing revolution, most smaller European countries will have gone bankrupt along with Iceland, Pakistan and Argentina and who knows who else. A new dawn will have arrived and what remains of the old world will have to be transformed to fit the new realities. Basically there is not enough cash on the planet to pay the Piper on this one.