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Jim Willie: The Tipping Point at Zero

Rickards builds a foundation that the financial sector has grown to the grotesque. He makes a grand alert that in this dynamically complex system, the size of the maximum potential catastrophe is exponentially greater than ever. He calls it inescapable.Imagine a pendulum swing left and right, with each move farther and higher, producing greater supposed wealth and prosperity on the positive swing but greater recognized destruction and poverty on the negative swing. Here are some facts to point out the extraordinary extremes that make return to normalcy impossible. The ratio of world financial assets to world GDP grew from 100% in 1980 to 200% in 1993 to 316% in 2005. Over the same 25 year period, the absolute level of global financial assets increased from $12 trillion to $140 trillion. The total notional value of all credit swap contracts (bond insurance) increased from $106 trillion to $531 trillion between 2002 and 2006. The notional value of equity derivatives (stock index contracts) increased from $2.5 trillion to $11.9 trillion over the same period, while the notional value of credit default swaps increased from $2.2 trillion to $54.6 trillion. Margin debt of US brokerage firms more than doubled from $134.6 billion to $293.2 billion from 2002 to 2007, while the amount of total assets per dollar of equity at major US brokerage firms increased from approximately $20 to $26 in the same period. To say that such extensions represent fantastic and monstrous leverage is a gross under-statement. Resolving the current extreme situation is not possible or feasible.

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