The Global Las Vegas

Click on the image to see the full size version.
Sources: World Settlement Bank, World Bank

As an earth scientist, I deal with real resources, such as water, oil, natural gas or coal, and I am bewildered by the figure above. It shows that the sum of goods and services produced on the Earth, or the World Gross Domestic Product (GDP), is as large as credit default swaps, and 10 times less than the total face value of all financial derivatives, including the credit default swaps.  Therefore, in the global casino we have created, bets on all things in the world have exceeded the value of what we actually produce 10-fold.  So if only 10 percent of these bets went wrong, an equivalent of world's GDP would be wiped out.  And our clueless politicians are piddling with a couple of billions of dollars here and there.  Or our hapless Treasury is talking about controlling the "core" inflation.

A credit default swap (CDS) is a form of insurance that protects a lender if a borrower of capital defaults on a loan. When a lender purchases a CDS from an insurance company, the liability of the loan becomes a credit that may be swapped for cash upon the loan defaulting. The difference between a traditional insurance policy and a CDS is that anyone can purchases one, even those who have no direct interest in the loan being repaid. Those other people are called speculators. If the borrower defaults on the loan, not only does the lender receive payment by the insurance company, but the speculators receive money as well. Therefore, the speculative bets on loans are as large as everything that 6.7 billion people produce on the Earth.

A derivative is a contract whose payoff depends on the behavior of some benchmark, which is known as the "underlying". The underlying is typically a tradable asset, for example, a stock or commodity, but can be a non-tradable such as the weather (in the case of weather derivatives). The most common derivatives are futures, options, and swaps. Derivatives can be used for speculating purposes ("bets") or to hedge ("insurance"). For example, a speculator may sell deep in-the-money naked calls on a stock, expecting the stock price to plummet, but exposing himself to potentially unlimited losses. Very commonly, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies.
In short, the sum total of speculative bets on everything on Earth is 10 times larger than all goods and services the Earthlings can physically produce.

Thus, Lesson Number One:

The global capitalism has created a monster that is 10 times larger than the world economy which feeds it.  No country on Earth is sovereign any more, and no democratically elected government has power sufficient to oppose the monster.  In particular, there would not be enough paper to print the new worthless dollars if a large fraction of the global bets went south, as will inevitably happen again, because nothing has changed. The most laughable thing is that instead of reigning in the monster internationally, we talk about reigning in the puny discretionary part of the federal budget in the U.S. The amount is below noise level in the bustling global casino. In short, we are watching helplessly the largest-ever electronic transfer of wealth from all and everything to the very few, who are accountable to no one. How is that good for global democracy?

The derivatives monster has created the ultimate complexity in the global financial system. It cycles immense torrents of money through itself and keeps but a tiny part of electronic cash after each pass. And each time we the public lose.

When this monster decides to strike, it can bet against a sovereign country, a Greece for example; depose an elected government, in a Portugal for example; and unseat a governor, senator or congressman in the U.S. I am pretty sure that for the last two decades all U.S. presidents have been fully aligned with the unspoken wishes of the monster. In fact, Goldman-Sachs, a major head of the monster, is the U.S. government of sorts.  In 2008-2009, the American and European taxpayers ended up feeding the monster with over 3 trillion dollars, so that it could recover faster from the self-inflicted wounds. 

P.S. The New York Times mentions $4 trillion worth of derivatives being traded per day.  If someone makes a profit there, we - the ordinary people - must take an equal loss, because nothing real, crude oil for example, can support this amount of daily betting. At $100 per barrel, the total value of world's daily production of real crude oil, NGL, etc., is $0.008 trillion, or 500 times less.

P.S.P.S. Each day your newspaper brings you more details about the tortuous ways in which you pay for the betting markets.  Since you're paying anyway, you may as well pay attention.

P.S.P.S.P.S.  I'll keep on listing new articles as they flood in every day:

Trying to deal with speculators, but only the small ones
More fraud at Goldman Sachs; I am shocked! 
U.S. Federal Reserve betting our money; I am speechless!
Everybody (but a few chosen ones) gets cheated on their investments; wow!
SEC official charged with fraud in a $7B Ponzi scheme; no! 
Speculators manipulate oil prices; impossible! 
Consumer protection from institutional cheaters; who would want that! 
Goldman cheating on clients; impossible! 
Both honest men on the Wall Street should be punished without mercy!