What’s Up with Derivatives?

derivatives, derivatives toxic, problems with derivatives investingQ: What are derivatives and why are they so dangerous?

A: Physical gold and silver you hold can’t be manipulated unless you decide to melt it. It’s stable and safe. Gold and silver react to market forces and inflationary and deflationary triggers – such as central banks printing currency – but the market, the rules, and decisions of others can’t destroy the inherent and natural value in these precious metals.

Derivatives, on the other hand, have been called financial weapons of mass destruction, due to their speculative nature and radical volatility. According to Richard Duncan, noted World Bank economist and author of The Corruption of Capitalism, there are some $700 TRILLION worth of derivatives still in existence worldwide.

Derivatives include a wide range of “assets” from a credit default swap or a mortgage to options and futures for everything from soybeans to interest rates. A lot of these derivatives are toxic – i.e., worthless – and yet they’re still held on banks’ financial statements at full value. Eventually, they’ll be exposed for the worthless paper they are, and the losses will have to be absorbed by someone. When that happens, companies will fail, stock values will fall, and markets will be shaken. Just a 1% loss on those derivatives is $7 trillion. That’s equal to nearly half the GDP of the United States in 2011!