(OPINION) If you thought that the collapse of FTX was something, just wait until the entire global financial system comes crashing down all around us. Most people just assume that the system is being managed by rational people that behave in rational ways, but of course, countless investors assumed the same things about FTX.
Sadly, the global financial system has slowly but surely been transformed into the largest casino in the history of the world. It is a colossal Ponzi scheme, and once in a while authorities give us a little peek into what is really going on behind the curtain.
For example, this week the Bank for International Settlements released a report that warned that 65 trillion dollars in “hidden” currency derivatives could potentially be a major threat to the stability of the entire system…
There’s a hidden risk to the global financial system embedded in the $65 trillion of dollar debt being held by non-US institutions via currency derivatives, according to the Bank for International Settlements.
In a paper with the title “huge, missing and growing,” the BIS said a lack of information is making it harder for policymakers to anticipate the next financial crisis. In particular, they raised concern with the fact that the debt is going unrecorded on balance sheets because of accounting conventions on how to track derivative positions.
Last year, the total value of all goods and services produced in the entire world was just 96 trillion dollars. So we are talking about an amount of money that is almost unimaginable. Everything will be okay as long as financial conditions remain relatively stable. But BIS analysts warn that “the next time dollar funding liquidity is squeezed” we could have an enormous crisis on our hands…
“Off-balance-sheet dollar debt may remain out of sight and out of mind–but only until the next time dollar funding liquidity is squeezed,” the analysts write. “Then, the hidden leverage in pension funds and insurance companies’ portfolios . . . could pose a policy challenge.”
So let’s hope that such a scenario does not materialize any time soon. According to the BIS report, banks outside the U.S. are particularly vulnerable… For researchers at the BIS, it’s the sheer scale of the swaps that’s worrying. They estimate that banks headquartered outside the US carry $39 trillion of this debt — more than double their on-balance sheet obligations and ten times their capital. Accounting conventions only require derivatives to be booked on a net basis, so the full extent of the cash involved isn’t recorded on a balance sheet. (READ MORE)
