Tuesday, November 4, 2014

Questions of a Derivative World

When we speak of derivatives, most people think of "financial derivatives". Yet the meaning of the word is much broader than any definition I have read - certainly much broader than any amalgamation of "financial contracts" between quant traders and their counter parties.

I would go as far as to say that we truly live in a "derivative world" - one in which the greatest measure of our reality is derived from our perceptions. True, we have been aware of the metaphysics of sensory perception since the time of Descartes, but this phenomenon has been taken to new extremes through its pervasive application to our economic system - and its impact upon our "values" in a deeper sense, from the moral fabric of our character, to the very core of our existence.

As mentioned before, I believe that economics truly defines the human condition in the modern world. It establishes our worth and guides our outlook, present and future. It defines relationships - between people, between systems, between countries.

I contend further that our entire global economic infrastructure is denominated by derivatives. They represent a mathematical construct that is at least 14 times larger than the entire world's annual gross domestic product. Mind you, this is not a finite predictive assumption with a 14 year time span - derivatives actually define the way we calculate global GDP, so in essence, they redefine economics in their own terms.

I highly recommend that you pay close attention to Rob Kirby in regard to interest rate derivatives, as they represent the majority of global notional derivatives by a very large margin, and these derivatives exist for a purpose - a "price control grid" as Kirby calls it. And the operative word here is "control".

Because derivatives exist in the realm of perceptions or expectations, they are far more easily controlled or managed than hard realities. Confidence for example, is a derivative of reality - an emotional state, derived from perceptions. One person can be wildly optimistic, and another wildly pessimistic about the same exact issue - there is no defined objective "truth" outside the derivative of our perceptions.

Our universal medium of exchange, our currencies, are derivatives of the dollar (as explained in prior posts) which is a derivative of gold. Our markets today are derivatives of the free market. Completely managed within the realm of derivative currency issuance and statements by the FED or ECB, moving markets on meetings and opinions which create impressions, perceptions expectations ... and great (front-running) anticipations.

We abide by the new "contractual" reality of our derivative world, so as to partake in the tangible benefits - as well as the less apparent penalties it imposes. Some will rage at our derivative world by calling it a "fake world" when penalized, but for those who benefit, the benefits do seem quite real - at least for the moment.

Our realities have always been subject to interpretive perception. What differs today is the massive amount of information that is made readily available to alter those perceptions at any given time - some in the form of objective fact, some in the form of managed propaganda, and much in the grey areas in between.

It is quite possible that the impact of economic derivatives has distorted any sense of "reality" that simple people in simpler times felt they once had a firm grasp of. We cannot truly define reality today, because so many derivatives of the singular truth - whatever that may be - are so pervasive.

Is it really true that one stack of printed paper defines immense wealth, whereas another stack of equal weight, with different words printed upon it, are relatively worthless? In our derivative world, we accept this to be true without question.

Is it really true that Kim Kardashian is "worth" more than 1000 engineers who build oil field pipelines, or 1000 surgeons who each save 100 lives a year? In our derivative world, our derivative value system somehow holds this to be true, even though intuitively, we find it perplexing.

Is it really true that a handful of multi-national banks can create more "wealth" out of thin air than all the economic output of all the working class people of Russia, India and China combined? In our derivative world, our derivative value system somehow holds this to be true as well.

Does our derivative world value system benefit all people equally? Of course not. Is this derivative value system morally, spiritually and socially superior? I leave this for you to decide.

As you consider these questions, think about gold in this context. Think about it in terms of "what is real?" Because people who have been caught on the wrong side of our derivative value system have been thinking about it for a long time now, and their thoughts deserve as much consideration as any.

Do consider them, as you witness the incongruence of world events - growing more and more perplexing, more and more nihilistic, each day. Have you been fully numbed by it? Or intuitively, does this derivative world of ours seem as unsustainable as our fiat value system?

Can we truly devote our lives to debt forever, as our derivative world promises? Or is there an intuitive human memory that we reach for when we seek the truth?

Perhaps this is the question of our derivative world? Perhaps it will not be "the markets" but rather our perceptions that will "collapse" when we grasp for a foothold upon reality. A fitting end to a derivative world?

Perhaps. We shall see.

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