You wouldn’t know it by watching the mainstream media or listening to political and economic leaders talk about the need for growth and recovery, but the global financial system is finished and the world is in for a painful prolonged economic collapse. Ah the joys of globalism.
What most people don’t realize is derivatives — which are financial instruments used to hedge risks or for speculation, which are derived from stocks, bonds, loans, currencies and commodities — were at the centre of the financial crisis of 2008. It was intervention by governments worldwide in the form of bailouts that staved off collapse in 2008, but since then world leaders have done nothing to negate the threat posed by the speculative trading in derivatives, they have actually allowed it to expand.
The derivatives bubble is pegged somewhere between 600 trillion and a quadrillion dollars and hangs over the global economy like the sword of Damocles. To put it into perspective, the entire economic output of the whole planet equals about $60 trillion a year. Most of the financial institutions that run the system of global trade and finance are major players in the derivatives market, and given the size of the bubble, are massively over-leveraged and pose systemic risk to the globalized economy.
When and how this bubble bursts is anyone’s guess. I would wager that Spain will default and accelerate the interrelated Eurozone and banking crisis. As the crisis spreads panic and fear across other vulnerable Eurozone countries, it will likely set off a ‘Minsky moment’ in the financial world where over-leveraged speculators in the banking and shadow banking system are forced to unwind positions into a one-sided sellers market. Once this happens the crisis will reach a tipping point where there is nothing governments and central banks can do to stop the panic that drives the market down and the collapse will be well underway. While this all may sound theoretical and abstract, when this bubble bursts it will have a very immediate impact on everything from pensions to the supply of fuel and that’s the real scary part.
People walk into the grocery store, gather what they need, swipe a card and they have food, 99.9 per cent of which comes from somewhere else, never stopping to consider the interconnectedness, complexity and fragility of the system.
Think about the physical transportation of goods (ships, planes, trucks, trains) as gears on a machine (the global economy), now think of finance as the grease. What happens when you don’t grease the gears on a machine? It seizes up and in this case the result will be empty shelves at the grocery store.
If the financial institutions that underpin the world economy collapse, there will be no credit to grease the gears of global trade. Ships will not leave port, planes will not leave the airport, trucks will sit idle and trains will not leave the yard. No goods will move, and as trade collapses, factories and businesses will close, communications will become impaired, social and government panic will lead to social and political unrest. World leaders had a chance to nip this in the bud in 2008 and chose to leave the conditions for an economic collapse intact, now those conditions have grown in size and severity.
Think about that the next time you read a news story about Mr. Harper signing these secret free trade agreements, further integrating you and I into a system that’s about to collapse.
Cody Young
Penticton
