The New CS Board

[jumanji0881]

Derivatives: Weapons of Financial Destruction -
Macleod: The Great Global Unwind Begins
https://www.zerohedge.com/markets/macleod-great-global-unwind-begins

My Comment: This rising interest rate environment is putting real pressure on banks through their derivatives exposure. Even Central Banks balance sheets are negatively impacted by rate increases. Something really big is going to break. The dominoes are lined up and ready to fall. This article is long, but it gives a very good discussion of the financial quagmire in Europe and Japan. Something really big is going to break.

Excerpts:
The LDI episode is a warning of the consequences of a change in interest rate trends for derivatives in the widest sense. We should not forget that the evolution of derivatives has been in large measure due to the post-1980 trend of declining interest rates. With commodity, producer, and consumer prices now all rising fuelled by currency debasement, that trend has now come to an end. And with collateral values falling instead of rising, it is not just a case of dealers adjusting their outlook. There are bound to be more detonations in the $600 trillion OTC global derivatives market.

The burden of bail outs will undoubtedly lead to new rounds of currency debasement directly and indirectly, as vain attempts are made to support financial asset values and prevent an economic catastrophe. Accelerating currency debasement by the issuing authorities will almost certainly undermine public faith in fiat currencies, leading to their entire collapse, unless a way can be found to stabilise them.

But one thing is clear: with CPI measures rising at a 10% clip, interest rates and bond yields will continue to rise until something breaks[color=red][/color]. So far, commercial banks are dumping financial assets to deleverage their balance sheets. The effects on listed securities are in plain sight. What is less appreciated, at least before LDI schemes threatened to collapse the UK’s gilt market, is that the $600 trillion OTC derivative market which grew on the back of a long-term trend of declining interest rates is now set to shrink as contracts go sour and banks refuse to novate them. That means that up to $600 trillion of notional credit is set to vanish, in what we might call the Great Unwind.

This downturn in the cycle of bank credit boom and bust will prove difficult enough for the central banks to manage. But they themselves have balance sheet issues, which can only be resolved, one way or another, by the rapid expansion of base money. And that risks undermining all public credibility in fiat currencies.