How serious is the Over The Counter (OTC) Derivatives crisis?
Economic Forces Converge Like Never Before
"Never in economic history has there been a night like tonight. I am writing later than usual because of the enormity of all the converging forces. The euro reaches for $1.60, the Middle East oil producers are in shock, and the IMF tells the world to “plan for the worst.”
The reason this missive is late is because I am reverberating at the speed of the disintegration. These cursed OTC derivatives and their makers, who incidentally made the international banking community rich beyond your wildest dreams, are now unwinding at lightening speed.
Do you think any entity with any OTC derivative now has faith in the paper?
This paper is $550 trillion plus dollars in notional value. The horrible fact is that in bankruptcy notional value becomes real value with the capacity to destroy the world financial system.
The above is no wild assumption. It is hard, cold fact.
1. Expect currency intervention to slow down the rise of the euro.
2. Intervention has never worked. It will not now. In fact, it will backfire so fast that the effort will be abandoned, making things even worse.
3. Intervention in currency, the dollar, will only provide the capacity for other central banks, oil producers and holders of high risk long US treasury paper to diversify out in huge amounts of decaying dollars at singular prices.
4. I could go through a tome on how intervention works, but accept that any rise in short rates will break the bank immediately. Intervention in the euro/dollar is another practical impossibility except as a bluff.
5. There is no practical solution to today’s TERMINAL problems and that means you are up to your eyeballs in alligators.
6. You must protect yourselves.
7. Gold is going to $1650. In all probability my major error will be in forecasting a price that is much too low for gold."