Despite the term derivative being thrown around a lot on mainstream media outlets and on alternative news websites, most people are really unaware of its meaning. For something that is worth a quadrillion dollars, everyone should know what it is. Simply put: a derivative is something that is valued based on another asset; it derives value from another bond or currency or other financial instrument.
See Also: Collapse of $1.2 quadrillion global derivatives market will lead to dollar collapse
Billionaire Warren Buffett recently sat down with a news publication and referred to derivatives as “weapons of mass destruction” and are financial instruments that will likely “cause big trouble.”
Speaking in an interview with Chanticleer (via AFR) last week, Buffett warned that derivatives will pose a significant threat to the global economy and financial markets.
“Derivatives, lend themselves to huge amounts of speculation,” Buffett said. “One thing about stocks is that with a settlement date of three business days from purchase you have a very short period of time between the commitment and when you settle up. That at least makes sure that things don’t exist as a fallacy or exist on paper for years.”
Buffett then spoke about the time he took over the derivative operation at Gen Re. The company took over contracts that ran for a century prior to any settlement, and people simply marked the numbers. “So the amount of speculation in credit you can introduce into the system through derivatives is pretty extraordinary.”
He added that the final blow in derivatives will be a dire threat to financial markets everywhere.
For instance, there was a certain amount of market disruption during World War I and soon after the Sept. 11 terrorist attacks. This is dangerous when it comes to a financial market that has trillions of dollars in outstanding nominal amounts “and no ability to settle up and who knows what happens when the market reopens.”
“This is a very dangerous situation,” noted Buffett. “Clearing houses help but they don’t solve the problem.”
This isn’t the first time that Buffett has outlined the dangers of derivatives. Here is what he stated in 2002:
“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
See Also: Global derivatives market reaches $710 trillion
According to the latest numbers from Switzerland’s Bank for International Settlements, the entire nominal amount of over-the-counter derivatives contracts outstanding in the world as of Dec. 2014 was $630 trillion. Think about that: $630 trillion. Does anyone even know how much this is? The entire planet’s gross domestic product is $75 trillion.
Remember, other estimates peg the real number of the global derivatives market at $1.2 quadrillion.
It’s no secret that another economic collapse is upon us. This time, however, derivatives will be playing a key role in the global meltdown of the financial system.
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