Reality Check wrote:You guys understand a language here I can not speak.
But I have a question?
In 1987, as I understand it - these 100s of Trillions of Synthetic Futures Contracts, or Synthetic Option Contracts, or Synthetic Insurance Contracts ( or whatever you want to call them ) placing speculative bet's on the economy just did not exist. Some small part of such existing contracts are actually hedge contracts on the economy, not speculative, as I understand it.
Does the existence of such derivatives with those kind of numbers involved make all past crashes, like 1987, have a lot less value for comparison and predictive purposes regarding what is happening, and will, happen now?
http://www.zerohedge.com/news/trade-stu ... c-collapse
http://www.feasta.org/wp-content/upload ... e-Off1.pdf
I've been looking over the second link here that is referred to in the Zero Hedge article. Obviously it is the author's opinion that the answer to your question is yes, that past crashes were less severe than what is upcoming, though there are more reasons for that than just the use of derivatives. I would say derivatives are symptomatic of other conditions that go hand in hand - that the huge growth in derivatives happened for underlying reasons that already indicated instability. Specifically what I mean there is the currency system became inherently unstable when it started to float and lost its link to gold. Let's say to give an analogy that a guy is bouncing up and down on a trampoline and his amplitude is 10 feet. That fact that he's at ground level is good because if he bounces up 10 feet and misses the trampoline he just hits the ground from 10 feet up. But now let's say he decides to raise his maximum height by a factor of 2 and reduce the amplitude by half, the reasoning being, hey, I'm less likely to fall off and my activity is more stable. That's what derivatives do. What everyone sees is just the second part of that. The problem is that once that step is taken the cycle is self reinforcing and pretty soon you're 100 feet in the air and bouncing in small increments. Within the previous conditions that appears sustainable. Problem is, what if conditions change and the amplitude begins to increase so at some point the guy is 100 feet in the air but now he's back to an amplitude on 10 feet again and can't lower himself to the ground. This is where the world financial system is.
I've given many such analogies through these 600 pages as well as some ideas similar to those found in that second link. From what I've read so far, at this time, I don't think any crisis can propagate with the speed he is projecting but given enough time and the "good fortune" that has occurred thus far at some point it becomes theoretically possible. But, really, rather than repeat more of what I think about this (which is already spread in many places through these pages) I wanted to link to someone else who has and maybe in more depth - I'll read it through and maybe make some comments as to how well I think he covered the topic.
Edit - I read through the second link and I'd say he kept it pretty basic in the discussion of derivatives. He makes the point that derivatives allow for greater use of leverage. Thus, there can be greater relative debt at the peak of the bubble and equity can disappear faster once the bubble starts to deflate. Once it's suspected that equity may have disappeared, then it becomes questionable whether any party that owes money to another through a derivative contract can pay. There's nothing new here that I can see in terms of discussion about derivatives. Though I think the main ideas he presents go hand in hand with the proliferation of derivatives. The complexity in today's economic system could not have gotten anywhere near this level without the use of derivatives and I think he raises some good points and examples about how this complexity makes it vulnerable.