I don't get this. The world is a closed system.
“”There is no possibility that the world could cover the losses””
I don’t get this. The world is a closed system.
Your world and my world is a closed system. We have income, debts, recurring bills, insurance, constant taxes, and assets. It’s straightforward and we all understand it.
I found all of this very confusing and I still don’t claim to completely comprehend it. The layman’s version in my mind is this. The banks and financial markets are operating under a completely different set of rules . The Federal Reserve and other World Monetary Authorities have digitized money. That means there is not a printed dollar or a fixed amount of currency in circulation for every dollar that exists on paper or in a computer (see fractionalized banking below).
See - http://en.wikipedia.org/wiki/Money_supply for the basic definitions. Pay attention to the M2 measurement.
See this thread from two days ago. It sadly only got 24 replies and not much attention but see the graphs on the thread. http://www.freerepublic.com/focus/f-news/2796492/posts
Now consider this - You have 10k in XYZ Bank. XYZ Bank has 40 billion dollars in deposits from individuals and businesses. However, XYZ Bank has “investments”, or in this case derivatives worth 400 billion dollars. They don’t have 400 billion dollars in deposits. They consider their 400 billion dollars in derivatives to be assets. However, it is not a real asset. It’s a bet, just like mortgage backed securities were a bet that the real estate market would keep appreciating and the assets (homes) would be worth more than the loans. In theory, there has to be a winner or a loser. Some bet against and some bet for. It’s all digital money right?
No, your money and mine is real. If the XYZ bank(s) bet wrong on the derivatives and the opposing bank(s) call in the digital note then XYZ bank(s) could collapse. The fantasy casino that has been created in the financial markets does not respect your deposits or mine. If the bank needs 400 billion to remain solvent (i.e.-meet it’s obligations) it is impossible. They don’t have the assets. If they try to leverage the assets they do have - your money and mine - those real deposits could be squandered in the attempt meaning the FDIC has to step in and cover their pledge for our losses and liquidate the bank to other competitors.
However, the Fed nor the U.S. Government has the funds or assets to cover 1/10th of the total pot the banks are gambling with. We already saw the Fed step in to cover the mortgage bets and it brought the world economy to it’s knees. On paper - the mortgage bets were real assets because somewhere there was a piece of real property associated with it. In reality, the mortgage bets were a gamble far beyond the real value of the asset. There are derivatives for everything including the stock market - in plain language, a bet for future earnings and value of an asset of some type. It is impossible for the derivatives on paper to be attached to a real asset that is worth even 10% of the paper bet.
It’s fractional banking taken to it’s logical conclusion and it’s all digital money. See - http://www.creditcrunchcookbook.com/2009/01/26/fractional-reserve-banking-explained/
The catastrophe is that these instruments are measured in dollars.... the same dollar you and I carry in our wallets and use to buy things. If the derivative markets crash (quite possible - even probable some say) the obligations have to be covered. The FDIC just got put on the hook for 75 Trillion dollars of B of A derivatives.... that is you, me, and the U.S. dollar. They would be presented with two choices - collapse the world economy or digitize the money to cover the losses. That is the outrage... the banksters take the profits on their bets and the nation absorbs the losses.
Derivatives are the ultimate bubble and the numbers are absolutely staggering. If anyone who is more educated than me thinks I got it wrong I will not be insulted and hope they straighten me out because it still seems to be a muddy mess.
Lengthy answer to your question and I know the explanation above is simplistic but I hope it helps. It’s not a closed system because the “value” of derivatives has continued to climb in a computer. The value is measured in real currency and when it crashes the paper or digital currency will become worthless.... just like the dollar in your pocket. These real markets between banks and nations seem seperate, but they are a fantasy profiting a few at the expense of the many. It’s not a story that would fit into a 5 minute news segment so it’s beyond our understanding and interest. Unfortunately, as we have recently seen, our politicians, leaders, and bankers will make us eat the losses to keep the system going. At some point the bubble will implode (they always do) and the dollar in your pocket could be fractionalized (massive inflation) and the dollar assets you have in the market and XYZ bank will be fractionalized. The U.S. Government and the EU cannot cover the bets made by banksters and it’s all tied together so if one fails there is mutually assured destruction. Think 10 times (it’s probably much more) the housing bubble and remember our central bank created the money (or borrowed it from our future earnings) to bail out the Bank of England and Deutsche Bank against the losses they suffered betting on our housing bubble.