"Today, the derivatives start to fail because the world trading system is slowing down, even as products are produced faster and cheaper. The economy has reached "the top of the mountain" and noone can see this.Though written nearly 18 years ago, we see the slow-motion acceleration of change. The actions taken in 2007 bought time, but now we see evidence of a "derivative rule change". The details and the possible future interpretation of the change is still unclear, yet to be understood fully. But the implications are clear.
As you read this, persons buy companies thru your Dow Jones at values that reflect "the supply of cheap oil" and it's good effects for business in general. What they do not see is the undoing of the currency world that "good business" must have to operate. The "oil standard" created and held this currency world intact, thru much abuse. Today, the "derivatives", that require a long future of "good business", are being "devalued"! Look far and wide as you are, now, at the top of this hill! The world will head down this slope because it is not a machine and is subject to "thin air".
History has shown that as persons slip from a high stance, they grasp for items that are known to be secure! They do reach for real things! Derivatives offer not a solid hold. It is well known that the modern gold market is fat with contracts derived from "intentions to supply". It is also known that the US$ continues on the "oil standard" because of this paper. No doubt, oil will continue to flow, but what currency will take this supply as we "walk down the mountain"?
In that day, "good money" will become "bad money" and "derivatives" will be paid to the holders of "derivatives"! In that day, a gold mine will also be paid in "derivatives", for it's gold will be for the benefit of all."
The managed expectation of a rise in interest rates is indeed the final tool, but it cannot defend the system much longer. Nor does it need to. We are at a crossroads where expectations are losing control over price discovery and stability.
The coming derivative crash will neither be bailed out, nor bailed-in - as neither action will be relevant. Currencies that are strong in gold will be trade able for other commodities like oil, food, land, vaccines. But currencies that derive their strength solely from the future promise of "expanding production growth for all economies" will fail with the derivatives that have so far been the engine of their FX value.
It is amazing the waste and destruction wrought upon the world and its dollar system to expand this expectation of "exponential growth far beyond capacity" with nothing more than future promises to fuel it. So the derivatives will be "written off", or if you wish "paid in derivatives" since either definition amounts to "worthless claims paid off in worthless promises".
It has already and for many years proceeded as "being slowly done" behind a facade of values held together by appearances, manipulation, technicals of the old paradigm supporting their own manipulated conclusions, the propping up of failure with more failure-doomed paper and the confidence of little people and Giants alike of this system to somehow soldier on.
Now, even Giants fear that the breakdown of globalism, as proven by the withdrawal of monetary support by key producer economies (whose willing participation in continuance of the status quo was required) will predicate a massive Lehman like derivative failure, among ALL primary dealers.
One cannot be sacrificed to save the rest (without this support).
Producer economies will gradually shift their mix to consumer, and consumer will shift to producer.
US goods will be prized for their affordability in dollars abroad, and will still have value in the U.S. for all sustainables produced there. Many wealthy foreigners will continue to invest in income producing commercial properties to take advantage of the arbitrage. The world will be much the same, only the nations will have switched roles.
In the slow-motion managed global economy of the 2007-2014 transition period, can you not see this trend already taking hold, despite the propaganda and perception management techniques of our digital era?
Then, when the derivative failure takes place, it will be more like a whimper than the former bang of a manic Paulson, and a squirlish Geithner, pulsating about in high pressure gyrations of fear and panic, waiving their arms frantically about in some fierce advocacy of an 11th hour debt salvation strategy.
It will simply be a realization that the derivative paradigm was not sustainable without the complete cooperation of all key global players, and therefore must be written off as worthless, within the context of each counter party's revaluation. And gold will have final settlement value between parties where FX differentials remain.
Not all currencies will burn, and none will burn within their local economy, only those that derive their international strength from derived valuations, and only in the context of the surviving FX market rate structure.
But the notional flame of derivative hypothecation will nonetheless be epic. Great mythical fortunes based upon them will vanish in the inferno.
In the end, all will be subject to gradual future change as economies and their regional make-ups change. These things could still happen tomorrow or ten years from now, depending upon how gradually, or how rapidly the change takes place.
True leadership will be of great value once again.