Derivatives Contraction Is Leading Cause Of Bank Deflation And Credit Crunch: Economists Ignore This Fact

Derivatives monster ate capital not debt

Derivatives monster ate capital not debt

Here is a typical example of how the huge Derivatives Beast is ignored by economists pretending to understand what is going on in the world.  I have explained for years how the derivatives game suddenly appeared during the years banks were deregulated and offshored.  This game meant NO CAPITAL was needed for lending and bankers lent money they didn’t have to all and sundry with wild abandon.  Then, when debt deals went bankrupt, there was no capital base to cover losses and the entire system suddenly collapsed in 2008.

This didn’t kill off the Derivatives Beast but it ceased doubling in size every 8 years or less.  This meant debt creation flattened with central banks sucking up debt contracts instead to the tune of hundreds of billions a year to keep the main banking structure from totally imploding.  So what are economists bloviating about these days?  Here is a typical sample:  Europe already has one foot in ‘Japanese’ deflation grave – Telegraph  by Ambrose Evans-Pritchard:


The EU authorities would do well to study Professor Irving Fisher’s seminal paper from Econometrica in 1933, The Debt Deflation Theory of Great Depressions. The central argument should by now be self-evident, though a certain sort of mind had trouble grasping it then, just as it does today. If the price level is falling – the “swelling dollar” in Hoover’s America – the real burden of the debt keeps rising..As Fed chair Ben Bernanke famously said in his 2002 speech, “Deflation: Making Sure ‘It’ Doesn’t Happen Here”, it is unforgivable for any central bank to let this happen. “Sustained deflation can be highly destructive to a modern economy and should be strongly resisted,” he said.


This childish idea that ‘inflation’ fixes depressions never dies because like wishing for the Tooth Fairy and Santa Claus, it makes thinking easier.  Pretending that mere inflation fixes anything is insanity.  Inflation is NOT GROWTH.  It is money printing.  Growing CAPITAL on the other hand involves physical things such as labor, land and savings accumulated via labor and land.  Ever since Karl Marx was thrown out of the bathtub and flushed down the toilet we have fanciful and elaborate mind games designing formulas explaining (sic) how banks work while leaving out the importance of labor to produce capital.  By isolating capital from labor, systems have been foisted on a billion people which is rapidly destroying the value of labor and thus reducing people into slavery.


This insidious mental game is used by rulers to reduce labor to slave labor because it helps concentrate wealth and capital at the top while eliminating it to workers so they no longer control the value of their work but rather are reduced to having no capital and many debts while inflation in food and fuel due to profit taking at the top drives them all into great poverty.  The latest scam is for the state to require workers fund their education so they can labor for someone and do this via taking on ruinous levels of debt which is then ‘unbankruptable’ that is, they can’t refuse to pay off these debts for any reason at all whatsoever.  Even death, these debts are imposed on their families forever.


The derivative game was glorious for international banks.  Virtually none of these odious contracts were or are held by small banks.  90% of it is held by the giant international banks.  The utter failure of the derivatives contract game was obvious to anyone with a brain in 2008 and smart people like myself foresaw this way back in 1996.  I have railed against derivative banking since it appeared because I correctly saw this as a RUSE to avoid putting up capital to back loans.  I also demanded this stop in 2008 but the Derivatives Beast lives on.  Barely.


The Basel Accords were supposed to fix the near total loss of capital due to the Derivatives Beast.  It forced banks to begin holding capital which for banks is an expense, they hate capital and love lending with none and then being bailed out by the giant central banks which then raids the National Capital for loot to write off these bad debts.  Here is a report from the BIS which regulates (poorly) the banking system used by the EU and US:  How have banks adjusted to higher capital requirements?


Spurred by stronger regulatory requirements, banks have steadily increased their capital ratios since the financial crisis. For a sample of 82 large global banks from advanced and emerging economies, retained earnings accounted for the bulk of the increase in risk-weighted capital ratios over the period 2009-12, with reductions in risk weights playing a lesser role. On average, banks continued to expand their lending, though lending growth was slower among advanced economy banks from Europe. Lower dividend payouts and wider lending spreads contributed to banks’ ability to use retained earnings to build capital. Banks that came out of the crisis with higher capital ratios and stronger profitability were able to expand lending more.


Lending expanded for exactly one reason: the ZIRP lending to the biggest banks thanks to the central banks.  Japan began this odious practice and then the US picked it up and now the EU does it.  ZIRP lending is ONLY for banks who then profit from this by lending it to other borrowers at a much higher rate of return which they then pocket.  This ridiculous system leads to depression because savers get zero return on savings while the central banks suck up increasing debt both government and banking debts which balloon rapidly to dangerous levels which is fixed by raising taxes ON WORKERS who also get no wage hikes due to the rich controlling fake democracies that work for them and not the workers.


It should be emphasised that neither a reduction in outstanding bank loans nor a slowdown in the growth of bank lending would necessarily be bad for the macroeconomy in the longer term. This is especially the case in the aftermath of a crisis that followed an unsustainable debt boom and left debt overhangs in its wake, as is the case at present. In the near term, as a precondition for a sustained recovery, non-performing and underperforming legacy assets are being written off and overleveraged borrowers are paying down their debts. The process of adjustment to a less leveraged economy has necessarily involved an extensive period of balance sheet clean-up and a shortfall of aggregate demand, a process that is by no means complete.6 To support growth over the longer term, financial and non-financial actors will need to adapt to conditions of lower economy-wide leverage, in which only durably profitable projects are funded and unsustainable booms are avoided.





The central banks are making up for the loss of the Derivatives Beast which ceased growing and indeed, has shrunk a tad.  The heroic effort at providing capital via money printing which then is soaked up by the biggest international banks who then…ask China!  It goes into international schemes to exploit cheap labor and make big profits thanks to ZIRP lending. Why lend it to say, students in the first world who need loans?  Make them pay higher rates!  Inflation due to union demands for more money or government war spending is quite different from commodity price inflation and property inflation.  Mixing up these two things is an ideological war on the workers.


Telling the middle class and workers that inflation is good when it is the most evil of inflation, commodity inflation and borrowing hikes as well as tax hikes…is dishonest and done in order to keep the workers and even middle class in chains.  When the average person reads again and again that inflation is ‘good’ and we don’t have inflation, I see in comments at articles like that, people bitterly complaining that inflation is roaring along and making them all poorer which is correct.


It is!  And due to rejiggering inflation data to hide this truth, fake economists can pretend we are in a deflationary spiral.  It is…FOR WAGES.  But not for commodities.  Even if these go down periodically, the trend has been, since the invention of the Derivatives Beast, generally high inflation far above the growth in wages across the board.  From the BIS:

economic formula that doesn't work



Look at the above magic formula!  Like programs showing runaway planetary heating which totally excludes the sun, this excludes labor.  And is great fun if one pops in numbers based on false incoming information.  and does nothing to explain what is really going on which has nothing to do with a formula at all, it is easy to see minus formulas.  These formulas were created to make this look ‘scientific’ but it isn’t and even ‘scientific’ formulas collapse when incoming data destroys the assumptions behind the formulas.


The fact that the universe is NOT expanding at all is a typical example.  The magic physics formulas ASSUME it is expanding and when all the incoming data  shows galactic inwards collapse, the formulas are now false but scientists cling to these like sailors lost at sea on a raft with no water.  They can’t do otherwise or their fellow sailors will throw them off the raft.  So they sail on to destruction and future generations will laugh at them.

China has more capital profit

For the G-SIBs, as well as for the advanced economy banks as a group, retained earnings were more than half of the overall increase in capital, accounting for 1.6 percentage points of the overall capital increase of 2.8 percentage points. Capital generated from other sources provided the rest, and was roughly equal to dividends paid. Retained earnings were more important for non-G-SIBs in the advanced economies than for G-SIBs, contributing 0.8 percentage points to an overall capital increase of 1.2 percentage points.

bank capital ratios, China most

‘Emerging economies’ means China.  China is the world’s #2 economy and the #1 economy when it comes to manufacturing.  The other emerging economies are midgets in comparison.  Note how their banking system has capital.

For banks in emerging economies, retained earnings were still more significant, contributing more than 80% to the overall increase in capital – 4.8 out of the total 5.7 percentage points. Dividend payouts were roughly twice other increases in capital for these banks (2.1 percentage points versus 0.9 percentage points). A very rapid accumulation of net income (corresponding to almost 7 percentage points in capital ratio terms) allowed these banks to increase their common equity quite substantially despite their relatively high dividend payouts.


In other words, ’emerging nations’ meaning mainly China, have fairly traditional banking systems.  And this leads to growth.  Unlike Europe, Japan or the US, wages are going up, not down.  Now on to the OCC report on the health of the Derivatives Beast in the US:

JP Morgan, Citibank, Goldman Sachs and Bank of America reduce derivative contracts


Credit exposure from derivatives decreased in the second quarter. Net current credit exposure (NCCE) fell 5%, or $19 billion, to $339 billion, the lowest level since the end of 2007.
 Low volatility continues to reduce trading risk exposure, as measured by Value-at-Risk (VaR). VaR averaged $376 million at the 5 largest trading companies in the second quarter of 2013, $35 million lower (9%) than $411 million in the first quarter.
 Notional derivatives increased $2.2 trillion, or 1%, to $233.9 trillion. Notionals have increased in only three of the past eight quarters.
 Derivative contracts remain concentrated in interest rate products, which comprise 81% of total derivative notional amounts. Credit derivatives, which represent 6% of total derivatives notionals, decreased 4% from the first quarter to $13.4 trillion….Legally enforceable netting agreements allowed banks to reduce GPFV exposures by 91.0% ($3.4 trillion) in the second quarter, $479 billion less than in the first quarter…Collateral quality held by banks is very high and liquid, with 75% held in cash (both U.S. dollar and non-dollar), and an additional 9.5% held in U.S. Treasuries and government agencies.


Yes, they are taking ZIRP loans from the Federal Reserve and turning it into CASH.  Which is a form of government capital for money is issued by the government and based on accumulated national debt and the US has tons of that…owed mainly to foreign powers like China and Japan and this is due to free trade destroying our economic base and wrecking the value of labor of US workers who mostly stand idle.  S&P 500 Soars To Record High As Wall St. Cheers Weak Job Growth shows exactly how the investing class thinks of labor.  The Fed Reserve will continue bankrolling them all at ZIRP rates only if many are unemployed so there is greatest incentive to keep unemployment high.


The above graphs from the OCC report show how the big remaining four Derivative Beast owners are reducing their game as much as possible while being protected by the Federal Reserve.  Yet look at this year’s sample of headlines about these four criminal operations:  Jury Finds Bank of America Liable in Mortgage Case… Bank of America liable for Countrywide mortgage fraud…  Goldman Pays $550 Million to Settle Fraud Case…   JPMorgan’s $13 billion fine: Pay-off, not extortion – The Term Sheet …  Massachusetts fines Citi unit $30 million for analyst misconduct… Citi to pay $730M fine…   Citibank to pay $285 million fine for housing market deal.  Arrest someone, please!  Starting with these ‘economists’.

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Filed under .money matters

9 responses to “Derivatives Contraction Is Leading Cause Of Bank Deflation And Credit Crunch: Economists Ignore This Fact

  1. Pingback: Derivatives Contraction Is Leading Cause Of Bank Deflation And … | Securitization Audits Blog News

  2. tio

    It’s about time you took the cork off your claws.

  3. DeVaul

    This is how the rich and their hangers-on make their money now:

    I would be mortally embarrassed to be associated with this, but my guess is that celebrities are distracted by their handlers enough not to notice.

  4. Luc

    All I know about Derivatives is they are funny money. The deck is stacked against the little [read ‘honest’] guy.
    Chelsea had a multi million dollar wedding, to a Hedge Fund guy. He is also
    Orthodox Jew. They are adopting an african baby.

  5. Luc

    Very off topic, but worth noting. If Obama had a brother, he d be a lot like this guy. This 14 year old is the son of what we call a ‘coal burner’. [as is Obama].

  6. Luc

    With 7? billion people on this planet and the population growing by A BILLION every 12 years, how could any informed person think Commodities could be deflationary? With 7, soon to be 8 billion resource hungry humans!

  7. Luc

    This is via todays Drudge:

    Oct 24, 11:45 AM (ET) WASHINGTON (AP) – The government says the rate of violent crime in America went up 15 percent last year and the property crime rate rose 12 percent, signals that the nation may be seeing the last of the substantial declines in crime of the past 20 years.
    Last year marked the second year in a row for increases in the crime victimization survey, a report that is based on household interviews.
    The 2012 increases were driven by a rise in crimes that were not reported to police, a category frequently involving less serious offenses. Simple assaults also rose. The rate of property crimes increased due to a rise in theft. Other crime categories – rape, robbery, aggravated assault, burglary and motor vehicle theft – showed less change.

    while a CATO study found that an average household in the District of Columbia currently receiving the six largest federal welfare benefits (Medicaid, TANF, SNAP, etc.) receives assistance with a converted cash value of $43,000. In Hawaii, it’s $49,000. ”

    The US spent 3.7 TRILLION dollars on welfare in the last five years!

  8. lcs

    “The magic physics formulas ASSUME it is expanding and when all the incoming data shows galactic inwards collapse, the formulas are now false”

    This is how I know you are a nut job and therefore cannot be trusted in other matters.

  9. DeVaul


    And this is how we KNOW you dislike Elaine because no one can really KNOW, like you do, that the universe is expanding towards infinity.

    You sure had to comb through a lot of her predictions that came true to find one point you disagree with as PROOF she is a “nut job”.

    I’ll stick with Elaine any day rather than scientists who lie for money.

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