Quote Originally Posted by billstew View Post
If ~10% of derivatives implode, the Western economy will melt...

And that is about ~70 Trillion, based on the existing published numbers from reasonably relyonable sources. The US / EU / Australasian / China bailouts have not even touched 10 Trillion (they squeak in around maybe 8 or 9 Trillions).

I have not done a spreadsheet simulation on the impacts of various percentages of derivatives going bad -- but someone must do so and publish the results.

I am of the school that you can have:

[Nominal: Total_existent_derivatives >= World_Economy*5%]

Total_existent_derivatives >= World_Economy*20%, else fail(wait-time-interval)

... and the world economy will function just fine

However, if the above bounds are exceeded -- disaster will eventually ensue.

The above condition is actually viable as there is a reasonable 5 year look ahead for commodities futures. The original kinds of derivatives were very helpful in commodities price stabilization, and I don't see them imploding as such. Modern kinds of derivatives are more harmful, but it is not known fully the good from the bad from the ugly.

Not all derivatives are harmful, but even if only 10% are -- it will probably be very bad news for the Western world economy. Nations isolated from the Western world economy will cope as they always have, and this is a good thing.

The finance sector part of the world economy is only 119 Trillion as of 2006 (The Ascent of Money TV series is my source). I assume the 119 Trillion has shrunk by only ~20%+ in real terms since the beginning of the 2008 global finance crisis ... and this crisis is bound to see 90% of that 119 Trillion vanish into thin air.

Assumptions:
There are about 700 Trillion in outstanding derivatives existent and in force.
The US will not print up to 700 Trillion in cash to patch up the crisis.
Maybe 300 trillion?