Thursday, 30 January 2014

Look at the size of that thing!

'That thing' being Deutsche Bank's exposure to derivative risk (compared, in this graph, to another big thing, namely the gross domestic product of Germany):
'That thing' looks terrifyingly huge, especially to the blogger from whose post I lifted this graph:
So imagine you are a large bank with huge derivatives business much of which covers bets in your equally large Foreign Exchange business. Essentially that boat in which you are hoping you can ‘net out’ about 70 Trillion dollar’s worth of derivatives positions is now being bounced about by several large storms...
...derivatives are, as Warren Buffett said, very dangerous. Deutsche is sitting on the world’s biggest pile of them and J P Morgan the second biggest pile. And right now global events are making those risks sweat... ...We are , I think, circling around another Morgan Stanley moment.
The post is, by the writer's own admission, 'circumstantial and speculative' (if the speculation is correct, the story will be coming to a newspaper front page near you some time soon). Even if it's dead wrong this time, it makes you wonder why everyone's so obsessed with deficit fetishism (in the case of the US and UK, the deficit was around 6% of GDP at the back end of last year). The entire UK national debt is under 90% of GDP.

According to the graph, the derivatives exposure of one German bank is somewhere North of 2,000% of the country's entire GDP. Is everybody absolutely sure that a big chunk of that exposure won't ever go pear-shaped some time and that event can't cause either, a) a global banking collapse, or b) national governments to be hit for yet more economy-busting multi-trillion dollar bailouts?

If not, why is deficit reduction apparently priority numero uno across the - admittedly narrow - mainstream political spectrum and complacency about too big to fail seemingly becoming the new normal?

You don't need to be a conspiracy theorist to be very afraid of something that big, given what a mere cock-up might do: