The coming $600 trillion debt bubble
“As interest rates begin to rise worldwide, losses in derivatives may end up bankrupting a wide range of institutions, including municipalities, state governments, major insurance companies, top investment houses, commercial banks and universities.”
The economy is seriously out of whack. The 25 highest-paid hedge fund managers earned a total of more than $25 billion last year—they continue to pay an income tax rate of 15 percent on what should be considered income not capital gains because their lobbying efforts have been so successful. At the same time, the median wage of Americans keeps dropping. Mr. Bernanke supported Wall Street with $23 trillion in interest-free money, now it’s time to work on the real economy. While Wall Street’s welfare queens have been busy collecting generous government handouts, the 50 states have been left to fend for themselves. Forty-eight states have faced budget crises in the past year, forcing them to cut school, library, and police services, and to raise sales and income taxes. We need to rectify the distortion where incentives and rewards are grotesquely tipped toward Wall Street and away from Main Street and entrepreneurialism.
The more immediate problem is restoration of prosperity and in the short term it will require more public spending, not less. We are told that we are living beyond our means—that Medicare and Social Security will bankrupt us and we’ve got to cut back on government programs, and to forget the solar panels, smaller classes, and new jobs. Taxes have been slashed since 1981 and the experiment hasn’t worked. It has not improved the economy and created good jobs. The investment boom has been different than some politicians and economists predicted would happen. The rich ran out of investments in the real economy and flocked to the casino on Wall Street; it helped to create bubble after bubble. The financial sector crashed as a result of tax cuts for the rich and deregulation.
We need to start looking at the income side of the budget. With a fairer tax system we could retrieve some of the money that has been siphoned away from the real economy by the elite for decades. Once a recovery is on track, we need to increase progressive taxation to reduce the deficit and to create a 21st century economy—investing in our crumbling infrastructure, education, energy efficiency and a green energy policy (eliminating our dependence on Middle East oil), and developing new trade policies that rebuild our manufacturing sector.
Next bubble: $600 trillion?
Cities, states, universities could sink from monster derivatives meltdown by By Jerome Corsi
As interest rates begin to rise worldwide, losses in derivatives may end up bankrupting a wide range of institutions, including municipalities, state governments, major insurance companies, top investment houses, commercial banks and universities.
Defaults now beginning to occur in a number of European cities prefigure what may end up being the largest financial bubble ever to burst – a bubble that today amounts to more than $600 trillion.
The Bank of International Settlements in Basel, Switzerland, now estimates derivatives – the complex bets financial institutions and sophisticated institutional investors make with one another on everything from commodities options to credit swaps – topped $604 trillion worldwide at the end of June 2009.
To comprehend the relative magnitude of derivative contracts globally, the CIA Factbook estimates the 2009 Gross Domestic Product, or GDP, of the world was just under $60 trillion.
Derivative contracts, therefore, have now reach a level 10 times world GDP, meaning even a 10 percent default in derivatives would equal world GDP.
The small 800-year-old town of Saint-Etienne in France has just defaulted on a $1.6 million contract owed to Deutsche Bank. The city entered into a complex currency swap arrangement to reduce the cost of borrowing some $30 million.
To cancel all 10 derivative contracts Saint-Etienne currently holds would cost the town approximately $135 million, more than six times the amount initially borrowed, largely because no bank or institutional investor would want to purchase contracts that are now on the losing side of the bet.
Saint-Etienne is only one of thousands of EU municipalities that bought into derivative contracts as a way to cut the costs of municipal borrowing. Source: WMD