WE were told that corrective measures would be taken with the banks-too-big-to-fail, but it never happened. The banks-too-big-to-fail has collectively grown 37% since the last down-turn. In 2015, the five largest banks in the U.S. account for approximately 42%of all loans while the six largest banks control 67% of all banking assets. If tomorrow those banks were to be destroyed by the derivatives market, there would be no economy left.
The entire US economy is based on the flow of credit and most all that debt comes from the banks. This is why it is so dangerous to become dependent on them. We are about to head into a derivative’s meltdown unlike anything ever witnessed. It’s going to make the financial meltdown of 1929 and 2008 look like a mere inconvenience. The politicians and the central banks promised that they would do everything to correct the problems associated with bank-too-big-to-fail” but they did not and now it’s too late to repair the process. The damage cannot be repaired and the inevitable avalanche has begun.
China’s mountain of reserves reached $3.44 trillion in the first quarter. That is an indication that the economy is once again facing heavy and unwanted capital inflows. Remember that China, aside from being the fastest-growing hoarder of gold on the planet, is also the biggest foreign holder of U.S dollars, with $2 trillion (along with $1.4 trillion in other currencies in its coffers to add backbone to any financial dealings it decides to engage in. Remember under the current circumstances in 2015, the more USD it has the more it stands to lose as the currency gradually inflates away, which means it needs to get rid of those USD as fast as possible by converting them into an appreciating asset.
When the price of oil stays at this level or goes down even more, someone is going to have to absorb some absolutely massive losses. In many cases the losses will be absorbed by oil producers but some of the big players in the industry have already locked in high prices for their oil next year through derivatives contracts.
The companies enter into these contracts for the following reasons: 1) many lenders do not want to give the producer money unless they can show that they have locked in a price for their oil that is higher than the cost of production; 2) derivatives contracts protect the profits of oil producers from dramatic swings in the marketplace; and 3) Russia stops providing Europe its natural gas at any price. These dramatic swings rarely happen, but when they do they may be absolutely crippling. So the oil companies that have locked in high prices for their oil in 2015 and 2016 are feeling pretty good right about now but those parties who are committed to the higher prices may become insolvent due to their financial commitments to purchase the commodity above the existing market price.
But who is on the other end of those contracts? In many cases, it is the big banks, and if the price of oil does not rebound substantially they could be facing absolutely colossal losses. It has been estimated that the six largest “too big to fail” banks control $3.9 trillion in commodity derivatives contracts. And a very large chunk of that amount is made up of oil derivatives.
By the middle of 2015, the world could be facing a situation where many of these oil producers have locked in a price of 90 or 100 dollars a barrel on their oil but when the price has fallen below 50 dollars a barrel someone pays the difference or goes bust. In such a case, the losses for those on the wrong end of the derivatives contracts would be astronomical. At this point, some of the biggest players in the shale oil industry have already locked in high prices for most of their oil for the coming year.
For those looking forward to the day when these mammoth banks will collapse, one needs to keep in mind that when they do go down the entire system is going to literally fall apart. The world’s economic systems are so completely dependent on the banks that there is no way that it can function without them. It is like a patient with an extremely advanced case of cancer. Doctors can try to kill the cancer, but it is almost inevitable that the patient will die in the process. This is only the beginning of the international collapse. Reportedly, Russia would soon ask its customers for payment of oil and gas in either the euro or gold.
At birth we boarded the train and met our parents, and we believe they will always travel on our side. However, at some station our parents will step down from the train, leaving us on this journey alone.
As time goes by, other people will board the train; and they will be significant i.e. our siblings, friends, children, and even the love of our life.
Many will step down and leave a permanent vacuum. Others will go so unnoticed that we don’t realize they vacated their seats. This train ride will be full of joy, sorrow, fantasy, expectations, hellos, goodbyes, and farewells. Success consists of having a good relationship with all passengers requiring that we give the best of ourselves.
The mystery to everyone is that we do not know at which station we ourselves will step down. So, we must live in the best way, love, forgive, and offer the best of who we are. It is important to do this because when the time comes for us to step down and leave our seat empty we should leave behind beautiful memories for those who will continue to travel on the train of life.
I wish all St Lucian’s a joyful journey for 2015 on the train of life. Reap success and give lots of love. More importantly, thank God for the journey.
Lastly, I thank you for being one of the passengers on my train.