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derivatives and currencies - implications for kapoom?

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  • derivatives and currencies - implications for kapoom?

    in general i find the discourse here has, over the years, become more fragmented, and less theoretical. early on, there were long discussions that eventually established a set of shared understandings. i think, in particular, of finster and his incredibly shrinking tape measures, and how what seemed obvious about his inflation harangues eventually penetrated deeper into my thinking than i had realized possible.

    now that the credit bubble has burst, at least that part expressed in the housing securitization market, and incipiently in the sovereign debt market, i think that the area we have yet to explore is the derivatives market. i remember being short jpm for a while, with the thought that its derivatives exposure would lead to a great conflagration triggered by the housing collapse. but it was not to be.

    the relationship of interest rate derivatives to the huge flows in the currency market perhaps has some relevance to kapoom theory, but the derivatives world is too opaque - to me at least - to say much about it.

    perhaps there are members here who can shed some light on the this set of issues?

  • #2
    Re: derivatives and currencies - implications for kapoom?

    Being short jpm is being short the us govt.

    I think a key feature of derivatives is their 'moneyness' or lack thereof; a large part of what i called the sucking sound was the evaporation of this quality: the requirement for posting collateral for cds being introduced for example.

    Derivatives allow the synthetic manufacture of an entity as tradeable as the underlying and with the same characteristics.

    I do feel interest rate and fx swaps are key in maintaing the current control structure but I am not clear how exactly. I suspect the use of the dollar as a unit of account in such contracts has contributed to dollar demand at times of stress.
    It's Economics vs Thermodynamics. Thermodynamics wins.