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We're a little crazy, about science!

A [Real life] Doomsday Prediction

end-of-the-world

Fire, brimstone, four horsemen, doomsday seems pretty bleak in the biblical context. From a scientific perspective, global warming and the need for fresh water will probably plunge people into chaos, which seems like a more likely doomsday model. Unfortunately there are other ways in which the world could come crashing down around us, today I wanted to shed light on just one of those ways.

The most plausible [in my opinion] doomsday scenario comes not from an external force but from our imagination. Let me explain, most money that we deal with is just a placeholder, a social construct, a number on a screen and when dealing with the stock market, it gets even fuzzier, you can essentially make bets for money on [you guessed it] money.

The end of the world, if it were to come anytime soon, would not be from war, famine or drought, but from a global stock market crash. Imagine the great depression the world over. It would be hard to pick up the global pieces and it’s hard to imagine that it would even be possible given the reliance on the stock market and credit [again a social construct].

How will this prediction come around you might ask, one word, Derivatives.

A derivative is a legal bet [really a contract] that derives its value from another asset, such as the future or current value of oil, government bonds or anything else.  A good example would be this–  A derivative buys you the option [but funny enough, not the obligation] to buy oil in 6 months for today’s price/any agreed price, hoping that oil will cost more in future. [I’ll bet you it’ll cost more in 6 months].

Derivative can also be used as insurance, betting that a loan will or won’t default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and ironically enough, you can buy a derivative on an existing derivative.

Since there is literally no economist in the world that knows exactly how the derivative money flows or how the system works, while derivatives are traded in microseconds by computers, we really don’t know what will trigger the crash, or when it will happen.  

If you recall how bad the the housing market crash was [here in the US at least] consider this– the housing market crash cost the US roughly $19.2 trillion dollars in the course of 2007-2009 [roughly]. Right now, the 9 largest banks [shown below] hold a total of over $288.72 trillion in Derivatives, roughly 1500% of the amount lost in the housing collapse — Or if you rather, approximately 3 times the entire world economy [yes I did just say world economy]. No government in world has money for this bailout, hell the world doesn’t have enough money for this bailout. 

derivs by bank

As I said earlier, derivatives are traded by computer, there is no real person dealing with a derivative directly. It would not be difficult for someone to come along and create a computer virus that could completely and very thoroughly bring down the derivative market. It wouldn’t even have to be for very long, even 10-20 minutes would cause havoc to the system. But therein lies the problem, the more complex the system becomes, the easier it is to have it come crashing back down.

So what about the FDIC, they are in charge of backing money in the banks [after the aforementioned great depression] up to $250,000 for each deposit ownership category in each insured bank. When the housing crash happened however, it almost sent the FDIC into bankruptcy. There was not enough money to go around and the taxpayers shouldered roughly $150 billion USD of that

The truth is the FSLIC already went bankrupt once [then it was merged with another company and formed the FDIC]. The worst part is, the FDIC has less than one cent for every dollar that is insured. It’s a house of cards waiting to fall and the worst part is there is nothing you and I can do about that expect switch banks.

Large scale banks [JP Morgan, Bank of America, etc.] hold most of the derivative assets. The best idea would be to switch to smaller credit union style banks which use the profits to offer their customers better deals and services.

So while I can’t accurately predict when this might happen, I want to at least suggest that it can and probably will happen, it would only take one person with the right knowhow to do it too… scary.

Sources:
Snider, L. (2014). Interrogating the Algorithm: Debt, Derivatives and the Social Reconstruction of Stock Market Trading Critical Sociology DOI: 10.1177/0896920513504603

Curry T. (2000). The Cost of the Savings and Loan Crisis: Truth and Consequences, FDIC Banking Review, 13 (2) 26-35. DOI:

Can be found here

(2012). Financial Crisis Response In Charts, U.S. DEPARTMENT OF THE TREASURY, DOI:

Can be found here 

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