The Size Of The Derivatives Bubble Hanging Over The Global Economy Hits A Record High

by Michael Snyder – Economic Collapse Blog

Bubble-Photo-by-Brocken-Inaglory-300x300The global derivatives bubble is now 20 percent bigger than it was just before the last great financial crisis struck in 2008.  It is a financial bubble far larger than anything the world has ever seen, and when it finally bursts it is going to be a complete and utter nightmare for the financial system of the planet.

According to the Bank for International Settlements, the total notional value of derivatives contracts around the world has ballooned to an astounding 710 trillion dollars ($710,000,000,000,000).  Other estimates put the grand total well over a quadrillion dollars.  If that sounds like a lot of money, that is because it is.

For example, U.S. GDP is projected to be in the neighborhood of around 17 trillion dollars for 2014.  So 710 trillion dollars is an amount of money that is almost incomprehensible.  Instead of actually doing something about the insanely reckless behavior of the big banks, our leaders have allowed the derivatives bubble and these banks to get larger than ever.

In fact, as I have written about previously, the big Wall Street banks are collectively 37 percent larger than they were just prior to the last recession.  “Too big to fail” is a far more massive problem than it was the last time around, and at some point this derivatives bubble is going to burst and start taking those banks down.  When that day arrives, we are going to be facing a crisis that is going to make 2008 look like a Sunday picnic.

If you do not know what a derivative is, Mayra Rodríguez Valladares, a managing principal at MRV Associates, provided a pretty good definition in her recent article for the New York Times

A derivative, put simply, is a contract between two parties whose value is determined by changes in the value of an underlying asset. Those assets could be bonds, equities, commodities or currencies. The majority of contracts are traded over the counter, where details about pricing, risk measurement and collateral, if any, are not available to the public.

In other words, a derivative does not have any intrinsic value.  It is essentially a side bet.  Most commonly, derivative contracts have to do with the movement of interest rates.  But there are many, many other kinds of derivatives as well.  People are betting on just about anything and everything that you can imagine, and Wall Street has been transformed into the largest casino in the history of the planet.

After the last financial crisis, our politicians promised us that they would do something to get derivatives trading under control.  But instead, the size of the derivatives bubble has reached a new record high.  In the New York Times article I mentioned above, Goldman Sachs and Citibank were singled out as two players that have experienced tremendous growth in this area in recent years…

Goldman Sachs has been increasing its derivatives volumes since the crisis, and it had a portfolio of about $48 trillion at the end of 2013. Bloomberg Businessweek recently reported that as part of its growth strategy, Goldman plans to sell more derivatives to clients. Citibank, too, has been increasing its derivatives portfolio, despite the numerous capital and regulatory challenges, In fact, its portfolio has risen by over 65 percent since the crisis — the most of any of the four banks — to $62 trillion.

According to official government numbers, the top 25 banks in the United States now have a grand total of more than 236 trillion dollars of exposure to derivatives.  But there are four banks that dwarf everyone else.  The following are the latest numbers for those four banks…

JPMorgan Chase

Total Assets: $1,945,467,000,000 (nearly 2 trillion dollars)

Total Exposure To Derivatives: $70,088,625,000,000 (more than 70 trillion dollars)


Total Assets: $1,346,747,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $62,247,698,000,000 (more than 62 trillion dollars)

Bank Of America

Total Assets: $1,433,716,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $38,850,900,000,000 (more than 38 trillion dollars)

Goldman Sachs

Total Assets: $105,616,000,000 (just a shade over 105 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $48,611,684,000,000 (more than 48 trillion dollars)

If the stock market keeps going up, interest rates stay fairly stable and the global economy does not experience a major downturn, this bubble will probably not burst for a while.

But if there is a major shock to the system, we could easily experience a major derivatives crisis very rapidly and several of those banks could fail simultaneously.

There are many out there that would welcome the collapse of the big banks, but that would also be very bad news for the rest of us.

You see, the truth is that the U.S. economy is like a very sick patient with an extremely advanced case of cancer.  You can try to kill the cancer (the banks), but in the process you will inevitably kill the patient as well.

Right now, the five largest banks account for 42 percent of all loans in the entire country, and the six largest banks control 67 percent of all banking assets.

If they go down, we go down too.

That is why the fact that they have been so reckless is so infuriating.

Just look at the numbers for Goldman Sachs again.  At this point, the total exposure that Goldman Sachs has to derivatives contracts is more than 460 times greater than their total assets.

And this kind of thing is not just happening in the United States.  German banking giant Deutsche Bank has more than 75 trillion dollars of exposure to derivatives.  That is even more than any single U.S. bank has.

This derivatives bubble is a “sword of Damocles” that is hanging over the global economy by a thread day after day, month after month, year after year.

At some point that thread is going to break, the bubble is going to burst, and then all hell is going to break loose.

You see, the truth is that virtually none of the underlying problems that caused the last financial crisis have been fixed.

Instead, our problems have just gotten even bigger and the financial bubbles have gotten even larger.

Never before in the history of the United States have we been faced with the threat of such a great financial catastrophe.

Sadly, most Americans are totally oblivious to all of this.  They just have faith that our leaders know what they are doing, and they have been lulled into complacency by the bubble of false stability that we have been enjoying for the last couple of years.

Unfortunately for them, this bubble of false stability is not going to last much longer.

A financial crisis far greater than what we experienced in 2008 is coming, and it is going to shock the world.


  1. We always seem to be on the edge of one Financial Disaster or another.

  2. Thomas The Tinker says:

    Ain’t it the truth… I’ve always seen the derivative market as a crowd of fools juggling a cloud of chainsaws back and forth. The first fool to drop one will set off a bloody mess than none of us could clean up.

  3. Hunker-Down says:

    Most of those four banks listed are also known as bullion banks. They rig the price of gold and silver by buying and selling thousands of futures contracts on the COMEX and other commodity exchanges.

    They are the main slaves of the federal reserve.
    It is in German, so click on the CC captions button to get an English translation.

    I have a question for the MSM: Why do we have to go to other countries to be informed about important US business events?

  4. JP in MT says:

    I feel that the fastest way to loose a lot of “money” is to play with derivatives and commodities. You can make money if you have a solid plan, but most individuals don’t have the information access to do it right.


    I can not explain why gold and silver are at the prices they are. I just call it a “buyers market” and partake when I can.

  5. Huh? That definition sounds like more gobbledygook to keep things , uh, going? Things like this are what scares me… Still trying to convince DH we need to Invest in more PMs… Gold, silver and lead.

  6. D. Smith says:

    Git your beans and rice, folks.

  7. Good article except I didn’t see an explanation as to why the previous and current bubbles are happening. The standard knee-jerk reaction I get when asking about the cause of such bubbles is the banks were greedy and selfish. So then I ask “Why would the banks, after decades of lending money to people they thought had a good chance to pay it back, and refusing to lend it to people they thought probably not be able to pay it back, suddenly go irrational and start lending billions to people they knew probably would not pay it back? Why would they adopt policies that they knew in the past would ruin them but suddenly think would not ruin them now? What caused this change in behavior?

    The answer is of course government intervention into the market place in the form of many fingers: the Fed keeping interest rates too low since 2001, Fannie Mae and Freddy Mac buying the banks’ toxic assets, the Community Reinvestment Act which was mandated to be a kind of rating agency which would not let banks and mortgage companies expand their businesses unless they could show they loaned x amount to poor people, by President Bush’s push for home ownership for everyone and so on.

    The problem is of course government enforced altruism, the notion that government must usurp to itself all forms of charity and benevolence to others. Yet that is not what the founders intended. They gave us the only proper function of government: “to secure these rights, governments are instituted among men.” The founders did not say “to provide everyone with housing, a safety net, an education, health care etc ad nauseam.” The founders wanted a society in which people were politically and economically free to provide for their own wants and needs while respecting the same rights of others.

    Yes, I think Mr. Snyder is right in that a big financial collapse is unavoidable now. The powers that be will declare that freedom has had its chance and has failed and now it’s time for a caring, benevolent, socialist dictatorship. It will have to be us, you and me, to stand up and say “NO! We didn’t fail, you did. Your desire to control us for our own good is an unmitigated disaster. It’s now time to go back to the freedom we once almost had, and to rediscover the principles that made it happen.”

  8. GoneWithTheWind says:

    Derivatives are not the problem. That isn’t to say a lot of people won’t lose a lot of money because they have investments in dirivatives (even if they are unaware of it). Derivatives are by design very complex and there is no real limit on how complex they can be made. So it is a part of economics not usually understood. To put it simply a derivative in terms the commn person could understand is you sell or promise to sell someone $100 worth of vegetables you grew in your garden and get the money up front. That person sells $50 of it to someone else and also sells them $10 worth of chicken eggs. That person sells half his vegetables to another person and half his eggs to a different person. Carry this on with different commodities beng added to the mix and or sold from the mix and that is what a derivative is. While it may be true you could add up each and everyone who bought some part of the $100 worth of produce and come up with a million dollars (as in sold and resold to a 100,000 people) but the underlying dollar amount is still $100. So now if someone tells you that there is a $70 trillion derivative market and when it collapses the investors will be out $70 trillion there is some truth to it. In fact it might be a couple billion actual dollars but when you add up everyone who promised to pay and everyone who “bought” it may well equal $70 billion. So the number is HUGE and it makes great press and that is pretty much the only reason it is being touted as the great problem. The real problem is simply that our government spends too much, borrows too much, prints money with nothing backing it and taxes excessively which hurts businesses AND it creates too many bureaucratic regulations and rules that stifle business. The problem is NOT derivatives. But when the collapse happens derivatives just like almost every other investment will lose value perhaps down to zero.

  9. D in MN says:

    I remember the last bubble in 2008 that burst. I was on an investment list and they were telling us to get out of mortgage and housing growth investments 5 months before the crash.

    So it won’t take much to bring it all down….. maybe something as small as a gnat that is swatted.

Before commenting, please read my Comments Policy - thanks!