Caught in a Derivative World

07 Sep

Derivatives Grow Without Government Regulation [courtesy Google Images]

Derivatives Grow Without Government Regulation
[courtesy Google Images]

Wikipedia defines “Derivatives” as:

“A financial instrument which derives its value from the value of underlying entities such as an asset, index, or interest rate—It has no intrinsic value in itself.  Derivative transactions include a variety of financial contracts, including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards, and various combinations of these.”

First, it’s important to grasp that, by definition, “derivatives” have no intrinsic value.  Because they have no intrinsic value, their perceived value is “derived” from something else that has an intrinsic value.  If a financial instrument has “intrinsic value,” its value would not be derived from something else and such instruments could not be “derivatives”.  Derivatives are and must be, by definition, intrinsically worthless.

Therefore, it seems strange, almost incomprehensible, to see that although derivatives have no intrinsic value, just four years ago, researchers calculated that the global value for derivatives totaled $1.4 quadrillion.   More recent calculations indicate that there are “only” $800 trillion worth of derivatives on the globe.

But how can there be $800 trillion worth of anything that’s intrinsically worthless?

Second, the term “derivative” is so broad and generic that it can be used to describe an almost unlimited variety of financial instruments and activities.   For example, our paper dollars are intrinsically worthless, but are still deemed to have value based on or “derived” from the “full faith and credit” and/or “confidence” of the American people.  From that perspective our fiat dollars are “derivatives” and any financial instrument denominated in dollars is at least party a “derivative”.

Our paper stocks and paper commodity certificates are all “derivatives” that have no intrinsic value, but nevertheless are deemed to have a value derived from the underlying value of a particular corporation or tangible commodity.

Given the enormous variety of derivatives, almost any paper financial instrument can be construed as at least partly “derivative” because the paper itself is intrinsically worthless.

Because the perceived monetary value and the variety of derivatives are both so great, the term “derivative” can mean almost anything financial.  Derivatives are therefore omnipresent and yet mysterious to the point of being incomprehensible.

●  How can anything that’s intrinsically worthless still “derive” $800 trillion in perceived value from a world whose annual Gross Domestic Product is only about $75 trillion?  Does it make sense that even though derivatives are intrinsically worthless, their total global value is nevertheless claimed to be more than ten times the world’s annual GDP?

Given that derivatives are intrinsically worthless, they seem to a kind of legal fiction, perhaps a financial illusion, that could be easily disposed of.   After all, how much harm can be caused by something that has no intrinsic value and, in a tangible sense, doesn’t even exist except in our imaginations?

Well, in our brave new world of globalism and fractional-reserve banking, everything is linked to, and dependent upon, everything.  Therefore, if even an imaginary link in our financial chain breaks, the entire global economic system can collapse—and millions, perhaps hundreds of millions, of people might die.

If derivatives somehow fail—no matter how imaginary they may be—our national economy and even the global economy could collapse.  Therefore, derivatives are profoundly important.

Seems crazy, doesn’t it?

But it’s no crazier than having a national (and even world reserve) currency whose perceived value depends on nothing more than public confidence.

●  Derivatives are often sold as a financial “hedge”—an insurance policy against disruptive financial events.

But, if an adverse financial event required all of the $300 trillion US “derivative”/insurance-policies to be paid, it would cost the entire productive effort of the entire world for 10 years.  A debt that great can’t ever be paid.

Get that?  There’s no way that all or even most of the derivatives can ever be paid in full.

OK—so let’s imagine a less extreme financial event that caused just 10% of the world’s “derivative”/insurance-policies to be paid.  That debt could only be paid by the entire productive effort of the world for one year.  Again, a debt that was just 10% of the global derivatives market is too great to ever be repaid.

The truth may be that if just 1% of the global derivatives were required to be paid, the resulting debt would probably be too great to ever actually be paid.  Thus, the derivative market may be about 1% valid and 99% fraud.

More, the illusory derivatives market is fragile.  One little screw-up and the national and/or global economies might implode.

●  Stranger still, banks that issue derivatives are obligated to make good on those derivatives before they make good on any debt owed to “unsecured creditors”.

Who are the “unsecured creditors”?

Ordinary bank depositors.

That’s interesting because, according to Tyler Durden at, there are about $9.3 trillion in US bank deposits and almost $300 trillion in “total US financial derivative exposure”.  Thus, if just 1% ($3 trillion) of the US derivatives had to be repaid, that payment could wipe out the savings accounts of nearly one-third of US bank depositors.   If 2% of derivatives had to be paid, two-thirds of American bank deposits could be wiped out.  If 3% of derivatives ad to be paid, bank depositors might lose all of their deposits.

Some depositors suppose that all of their savings are protected by FDIC insurance.   That’s true, but only up to the limit of the FDIC’s total capital reserves.  Currently, the FDIC has $25 billion in reserves.  $25 billion is enough to insure only 0.26% of all US bank deposits.  $25 billion is enough to insure repayment of only  0.0083%—less than one one-hundredth of a percent—of total US derivative exposure.

Thus, if just a fraction of a percent of total US derivatives exposure had to be repaid, the FDIC could be wiped out.  Once FDIC reserves were exhausted, we’d see a national banking system panic that would quickly bankrupt the vast majority of US banks.  Result?  The vast majority of US bank depositors would quickly see that their credit cards, debit cards, checking accounts and bank deposits were gone, gone, gone and, um, gone.

Thus, the entire US savings deposit system is extraordinarily vulnerable to any event that might cause the repayment of even 1% of derivatives.

●  Bonds are vulnerable to losses caused by rising interest rates.   Many derivatives are tied to interest rates.  They’re “insurance policies” that guarantee that if interest rates climb significantly, those companies that invested in financial instruments (like bonds) would be protected against losses.

For example, suppose I were fabulously wealthy and I decided to invest $1 billion in US bonds when the interest rates were low and likely to go lower.   So long as interest rates stayed low, my investment would be safe.  If interest rates continued to decline, I might even make a handsome profit.

I might be bright enough to know that investing in paper debt instruments was risky.  If interest rates rose, I could lose a lot.  But, I might still believe that such a huge profit could be made in bonds that I couldn’t resist the temptation to invest in paper-debt instruments.

But—seeing as I didn’t acquire $1 billion by being a complete idiot—I could hedge my “bet” on bonds by also investing in some derivatives.  Those derivatives would act as an insurance policy against the possibility that interest rates would climb so high that my bond investments might suffer losses.

By buying both bonds and derivatives, my investment strategy would be something like “Heads I win, Tails You Lose”.

But there’s a problem with my “heads I win, tails you lose” investment strategy:  I’m not the only guy smart enough to use it.  The other “big boys” are just as smart and just as greedy as I am.  Therefore, they’ve also invested in (i.e., “bet on”) paper bonds and also bought paper derivatives to hedge (insure) their bets.

So, if interest rates ever climbed high enough to cause me to lose money on my bond investments, all of the other “big boys” would also lose money on their bond investments.  Thus, at the same time I made claims on my derivative/insurance policy, all of the other “big boys” would also be making claims on their derivatives.  In a sense, rising interest rates could cause a “bank run” on the financial institutions that had sold the derivatives.

But, this wouldn’t be an ordinary bank run of the sort seen in the A.D. 1946 movie “It’s a Wonderful Life” (starring Jimmy Stewart and Donna Reed).  In that movie we saw a bank run at a small bank where scores, perhaps hundreds, of “little guys” heard the bank was in trouble and therefore jostled to get their $10, $20 or even $100 out of the bank’s vault.  Today, if we saw a similar bank run, we might see thousands of “little guys” pushing, shoving and cursing to get their $2,000, $5,000 or even $50,000 out of their savings accounts.

However, if there were an event that triggered claims on derivatives, we wouldn’t see an ordinary “bank run”.   We’d see a “derivatives bank run” that would be very different in that only a few individuals—the few “big boys” who held derivatives—would be demanding that banks pay whatever financial obligations were associated with their derivatives.  But each of those individuals (or institutions) would be trying to collect billions—not thousands—but billions of dollars from the bank.

Thus, a “derivative bank run” might barely be visible in a physical sense.  There’d be no crowd of bank customers screaming for their savings.   There’d be only a few lawyers, politely demanding the funds owed to a handful of individuals or institutions.  But a “derivative bank run” could still be monumental in a financial sense because each lawyer would be demanding billions of dollars.

The FDIC’s $25 billion “insurance policy” is intended to protect against one, two, perhaps even five “bank runs” by the “little guys”.

But there’s no insurance policy—not one—that can protect against a “derivative bank run” by the “big boys”—except for massive and perhaps unconstitutional government intervention of the sort we’ve seen since A.D. 2008.   In a fractional-reserve banking system where every dollar is leveraged ten or a hundred times, the likely result of even a small “derivative bank run” could be a systemic collapse.

●  Why?  Because the bankers engaged in fraud by selling far more “insurance policies” than they could ever hope to repay.  in the event of a “derivatives bank run,” the financial institutions that sold the derivatives would be forced to default on all or even most, of the “big boys’” claims.

That would cause a bunch of the “big boys” to lose much of their investments in bonds—and in derivatives—and therefore suffer huge losses.

Because one man’s paper debt is another man’s paper asset, if the debts due on derivatives can’t be paid, the value of correlative “assets” (the paper derivatives, themselves) would vaporize.   The ripple effect could be massive.

I.e., if I were holding a derivative, made a claim on that derivative and the bank that issued my derivative defaulted, then I’d not only lose money on my bond investments, I’d also lose whatever value was attached to my derivative.  In an instant, I might be reduced from the status of a paper multi-billionaire to that of a man merely holding a handful of paper.

Well, big deal, right?  Who cares if one of the “big boys” is suddenly impoverished?

In fact, everyone should care if a paper-billionaire goes broke because some or all of that billionaire’s paper wealth is probably being used as collateral to fund more loans.  I.e., under fractional-reserve banking, if I had $50 billion in paper-derivatives, I or some financial institution might be able to use that $50 billion as paper collateral sufficient to justify lending as much as another $500 billion in paper loans to others.   Some of my $50 billion in paper wealth might fund construction of new skyscrapers, bridges, businesses, homes or cars.

But—suppose that the bank that issued my $50 billion paper-derivative was forced to default.  Then, the perceived value of my (intrinsically-worthless) $50 billion derivative would instantly crash.    If my $50 billion derivative was suddenly seen to be worthless, it could no longer suffice as collateral for the $500 billion loaned out to fund the building of skyscrapers, bridges, businesses, etc.  All of those loans might have to be called in.  All of those projects might have to stop.  All of the people who’d invested in those projects might lose much of their capital.  All of those working on those projects would be suddenly unemployed.  If banks defaulted on $50 billion in derivatives, the banking system might have to call in $500 billion in loans.  The result could be catastrophe.

All of these numbers are only hypothetical.   My hypothetical $50 billion derivative might only be used as collateral to lend $10 billion.   Nevertheless, the principle remains:  in a fractional-reserve world, almost every investment is so leveraged and inter-dependent, that if just one “little thing” screws up, the entire banking system might collapse.

$300 trillion in US derivatives is not a “little thing”.

$300 trillion in US derivatives is arguably the single biggest thing in US finance.  If just 1% of that $300 trillion defaults, the whole financial system could collapse.  In the midst of such collapse, millions of Americans might not merely be inconvenienced or infuriated—they might die.

Thus, on the one hand, derivatives are no game.  On the other hand, they’re the biggest game in town, the biggest in the country, the biggest in the world—the biggest financial “con-game” of all time.

●  You might suppose that big banks (being lenders) would want higher interest rates so they can make more profits off lending capital to borrowers.  That’d be true—if banks weren’t up to their ears in derivatives.

However, so long as the big banks have issued derivatives which must pay off if interest rates rise excessively, those banks have an unexpected interest in suppressing interest rates.  There’s a mathematical point where rising interest rates could cause banks to lose more money paying off derivatives than they could gain by charging higher interest rates on their loans.

I don’t know where that mathematical point is.  However, given the massive quantity of derivatives, it’s likely that the “mathematical point” in interest rates is fairly low.

I.e., if bankers saw the interest rates rise from 3% to 6%, they’d double their profits from their loans.  Hooray!

But if bankers saw interest rates double, that rise might also be sufficient to cause the bankers to pay out hundreds of billions of dollars on derivative claims.   Unable to pay those billions, the banks would be bankrupt.  Boo!

●  So, here we are, living in a world where big banks—whose principle business is supposed to be earning profits by making loans at relatively high interest rates—have a vested interest  in keeping interest rates low.

Does that make sense to you?

Isn’t the big banks’ interest in suppressing interest rates evidence of the financial madness that’s inherent in our current economic system?

Since A.D. 2008, the Federal Reserve has held interest rates down close to 1%.  The express purpose of these low interest rates was to encourage borrowers to take out cheap loans, spend the money, and thereby stimulate the economy.

However, I believe the primary reason that the federal government and Federal Reserve have both:  1) subsidized the big banks with nearly $2 trillion in Quantitative Easing; and, 2) held interest rates artificially low—was to  prevent interest rates from rising high enough to trigger disastrous claims on derivatives.

The financial collapse of A.D. 2007-2008 was allegedly triggered by a collapse real estate values.  But the real problem was the mortgage-backed securities that were suddenly shown to be “toxic” (worthless) when borrowers began to default on the underlying mortgages.

The “mortgage-backed securities” were derivatives.  They had no intrinsic value.  Their perceived value was “derived from” the value of the underlying mortgages.  When borrowers started to default on their home loans, the underlying mortgages were shown to be worthless.  The resulting loss in home prices was not as critical as the resulting, leveraged losses in the “derivatives” we called “mortgage-backed securities”.

The reason some banks were deemed “too big to fail” was probably that they’d issued more derivatives than they could make good on.  If they defaulted on the derivatives, the whole system might collapse.  Therefore, the gov-co did everything from give the banks free money and also to “buy” the customer’s “toxic assets” (failed derivatives) in order to hold the system together.

But, despite gov-co’s Herculean efforts to save the banks from a “derivatives bank run,” our economy has not recovered.  Instead, the consequences of the failure of “mortgage-backed securities” (derivatives) in A.D. 2008 are still plaguing our economy.

Plus, there’s another round of defaults headed our way based on derivatives that allegedly insure against high Interest rates.  Does government have sufficient resources to withstand another wave of derivative defaults?

●  If US bonds become “toxic assets,” will the Federal Reserve buy them as they once bought the “mortgage-backed securities”?  Isn’t the Federal Reserve already buying US bonds as “toxic assets” insofar as the Fed is purchasing about 80% of all US bonds issued by the federal gov-co?

Still, I have to give the gov-co credit.  I begin to see that gov-co efforts helped us to weather our first big derivative default (“mortgage-backed securities”).  The US and global economies suffered huge losses and slipped in recessions and/or depressions. But we haven’t seen economic collapse.  We haven’t seen economic chaos.  Not yet.

But interest rates are rising and threatening to touch off another wave of derivative defaults.  Does gov-co still have enough resources to weather a second wave of failed derivatives?

75% of Derivatives based on Interest Rates [courtesy of Google Images]

75% of Derivatives based on Interest Rates
[courtesy of Google Images]

I don’t think so.  While the “mortgage-backed securities” comprised a relatively small slice of America’s derivatives, the Bureau of Labor Statistics estimates that 75% of derivatives are based on interest rates.  If 75% of America’s current $300 trillion in derivatives failed, there’s no way that even a world government could prevent a collapse.

Sooner or later, the world’s $800 trillion in derivatives will likely collapse the US and global economies.  The only question is “When?”

●  Derivative are defined as “intrinsically worthless”.  Derivatives are known to be intrinsically worthless.

Nevertheless, we’re living in a world wherein, if derivatives are actually shown to be worthless, our national and global economies could collapse.  Thus, a widespread appreciation of the truth about derivatives might be sufficient to plunge our economy into chaos.  Conversely, we are dependent on lies and illusions to sustain our economy.

Our fiat-currency/fractional-reserve financial system is a kind of madness that’s based on illusions and lies.  And almost every one of us is caught in that system, right up to our ears.  The only people who are separated from this madness are those who hold their wealth in a form that is not derivative and not intrinsically worthless.

In view of America’s collective madness, do you begin to understand why it’s so important to flee intrinsically-worthless, paper-debt instruments (whose values are “derivative”) and store your wealth in a tangible media like gold or silver whose value is “intrinsic”?


Posted by on September 7, 2013 in Derivatives, Economic collapse, Federal Reserve, Lies, Values


Tags: , ,

21 responses to “Caught in a Derivative World

  1. Tony

    September 7, 2013 at 4:21 PM

    Hi Al,

    There are two things that really perplex me about this derivatives insanity.

    1)To whom is the derivatives debt owed?

    2)Why couldn’t or wouldn’t whomever is owed this debt, forgive it? (Thus being decent folks who could be heroes for saving the global economy and wouldn’t anyone want to save the global economy?)

    Is it possible whomever is owed this insane quantity of “money” (using the term money loosely) doesn’t want it forgiven because at the right time they want the global economy to be collapsed according to an agenda? And if so, it would seem to follow that the agenda would include some contingency for a collapse and if so, what would that contingency be? (I would guess the ushering in of a global money system that would eventually be cashless.)



    • Adask

      September 7, 2013 at 9:02 PM

      Derivatives are the financial equivalent to a health insurance policy. You pay $500 a month for your health insurance. If you get sick and need a $500,000 operation, the health insurance company guarantees to pay that $500,000. Although the insurance company will lose money on your insurance policy, the insurance company “knows” (actually, it’s “betting”) that if they issue 1,000 health insurance policies, the statistics indicate that only one or two policy holders will need the $500,000 operation. The remainder of the insurance policy holders will pay in $500 every month and the insurance company will still make a considerable profit.

      Of course, if the statistical projections were wrong and 500 customers each needed a $500,000 operation at the same time, the insurance company would be unable to pay for most of those operations and bankrupted.

      Same thing with derivatives. People purchase derivatives to insure against particular financial event like prime interest rates rising over 6%. The banks selling derivatives have calculated the probability that derivatives will rise over 6% to be small and therefore unlikely to require a payout. But if the statisticians are wrong and interest rates exceed 6%, the banks will encounter the financial equivalent of an health insurance company suddenly needing to pay out on 500 $500,000 operations. The requirements to pay out will exceed the banks’ reserves and the bank will be driven into bankruptcy. As a result, most of its ordinary depositors will also be rendered penniless.

      The debts associated with derivatives are owed to whoever bought them. The fact that they do or don’t get their “insurance” money is almost insignificant. What’s significant is that, if the “secured” derivatives can’t be paid by the banks’ reserves, the banks will use their customer’s “unsecured” bank deposits to try to make good on their debts to derivative holders. If MY derivatives are too great for the bank to repay,YOUR bank accounts will be wiped out. If millions of American lose their bank account savings, the whole economy will implode.

      As for why the derivative debts couldn’t simply be “forgiven,” I will ask you why the debts the banks owe to their depositors couldn’t also simply be “forgiven”. I.e,, if you had your life savings (say, $100,000) in your bank account and the banker said, “Sorry, we spent your money on somebody else,” how likely would YOU be to “forgive” that debt owed to YOU? How willing are you to surrender YOUR life savings to help save the Global Economy? Would you rather be a rich bastard or a penniless hero?

      The individuals holding derivatives are just like you. They are just a likely as you are to choose to become a penniless hero by “forgiving” whatever debts are owed to them.

      Any explanation for why derivatives might be used crash the economy could sound reasonable. But the problem is that the whole financial system is fundamentally insane and no “reason” is possible or relevant other than that the bankers saw an “angle” (derivatives) whereby they could make an instant fortune. They implemented that “angle” knowing (or not) that the eventual result would be financial collapse. The bankers didn’t know or care about the financial ruin that would strike at some future date, so long as they could first get rich quick.

      So, here we are. Approaching what appears to be a “day of reckoning” when a mass of derivatives may have to paid, can’t be paid, and therefore the financial system may be bankrupted.

      What’s the ultimate “reason”? Five letters: G-r-e-e-d.

  2. Martens

    September 7, 2013 at 7:59 PM

    The FDIC insures depositors, not banks. If your bank gets caught on the wrong side of some huge derivatives bets, it’s not the FDIC’s problem.

    Thus, the size of your bank’s derivatives risk is irrelevant as far as the FDIC is concerned. The FDIC only needs reserves, or access to credit, sufficient to cover your bank’s deposit accounts.

    • Jetlag

      September 7, 2013 at 9:42 PM

      @Martens “The FDIC only needs reserves, or access to credit, sufficient to cover your bank’s deposit accounts.”

      Special attention to the “access to credit” part.

      The FDIC exists by act of law. Consequently, the Department of Treasury has guaranteed that, if the FDIC exhausts its own reserves, the US government will step in to provide the FDIC with whatever additional funds may be necessary.

      So the FDIC has been granted a form of “too big to fail” status. This was deemed necessary to maintain depositors’ confidence in the banking system.

      Though keep in mind that this rescue of the FDIC would be in the form of newly-printed funny money borrowed at interest from the Federal Reserve, as usual.

      • Martens

        September 7, 2013 at 10:35 PM

        That’s correct.

        “FDIC insurance is backed by the full faith and credit of the United States government.”

      • Adask

        September 7, 2013 at 11:26 PM

        The government, itself, can bail out the FDIC or any other financial institution by simply printing more fiat dollars. But when they do, those extra dollars will ultimately contribute to a significant monetary inflation and rising prices.

        More, even the government and the almighty Federal Reserve have limits. Over the last four or five years, Quantitative Easing has pumped about $3 trillion into the economy. Currently, QE3 is pumping $85 billion per month (about $1 trillion/year) into the economy. We might guess that the Federal Reserve can’t pump much more than $1 trillion per year into the economy.

        But there are reportedly $300 trillion in US derivatives. Of that, 75% ($225 trillion) is based on interest rate changes. Let’s suppose just 5% of the interest rate derivatives defaulted at the same time. The Fed might have to print an additional $11 trillion in one year to hold the system together. That would be about FOUR TIMES as much in ONE YEAR as the Fed has printed altogether for QEs 1, 2, and 3 in the past FOUR years.

        I don’t believe the Fed can print that much fiat currency in just one year. If it can, it can’t do so without triggering hyper-inflation. In either case, the dollar will be depreciated and the public will be impoverished. Creditors will be ruined. Savings and pension funds will be vaporized. The economy will collapse.

        The sheer magnitude of derivatives is so great that there’s no earthly force sufficient to correct or restrain even a modestl derivative default.

        That tells me that it’s just a matter of time until the derivatives hit the fan.

  3. Adask

    September 7, 2013 at 8:27 PM

    My understanding is that if the banks are called on to pay their obligations on derivatives, those obligations can and presumably will be paid by taking money out of the unsecured-creditors’ (depositors’) accounts. Those depositors’ accounts might be “insured” by the FDIC.

    If so, then if the persons holding derivatives are to any extent paid off out of the depositors’ accounts, the depositors might have a basis for making a claim against the FDIC. But if the FDIC has only $25 billion, the FDIC funds will be quickly exhausted, leaving the remaining bank depositors without any real “insurance” or defense against having their bank deposits taken by their bank to pay off on the derivatives.

    Because the FDIC funds are so small, they would truly be virtually “irrelevant” if banks were called on to make widespread payments on derivatives. The banks derivatiive obligations are “secured”; the banks deposits are “unsecured”. My point in referencing the FDIC was to try to illustrate that, in a worst case scenario, even ordinary bank customers’ unsecured deposits can be taken to repaly the banks’ “secured” obligations to the derivatives’ owners.

    • Yartap

      September 8, 2013 at 7:41 PM


      I believe that only a bank can make a claim against FDIC, not a Depositor. The insurance to protect Depositors is between FDIC and the Bank member of FDIC. It’s a Derivative, too! But not one which has government protection against other Derivatives thanks to Dodd-Frank.

      • Martens

        September 8, 2013 at 8:57 PM


        Your belief is incorrect. The depositor makes the claim.

        FDIC deposit insurance provides for situations in which the bank may no longer even exist. Requiring the bank to make the claim wouldn’t work too well in such cases.

        When a bank failure occurs, the FDIC pays out claims in the following order of priority:

        1. Depositors
        2. General unsecured creditors
        3. Subordinated debt
        4. Stockholders

      • Yartap

        September 9, 2013 at 4:09 PM

        Hi Martens,

        I agree, but you have to figure in a Bank’s sale of Derivative to customers (the first Claimers, not Depositors) and the failing FDIC.

        If FDIC fails or your Bank cannot pay its FDIC membership, what do you have and where is your claim against? It still lies with the failed Bank. But Banking Laws (Dodd-Frank) make it clear that the Bank’s Derivative Customers are paid first before Depositors. FDIC was not to protect Derivative Customers, but Banking Laws set who is paid first. And it ain’t the Depositor.

        Because FDIC is almost bankrupted, its only means of working is to get other banks to step in and take over the accounts for now. But the time is coming when the accounts will be funded for pennies on the dollar. This is our fears.

      • Martens

        September 9, 2013 at 6:07 PM


        This is an unfounded fear. You and honest bloggers like Prof. Adask have been misinformed. If you did a little digging, you’d likely find some undisclosed conflict of interest on the part of the “researchers” responsible for this lie.

        The FDIC was established by law in 1933. It cannot go bankrupt or pay out “pennies on the dollar” to depositors.

        It wouldn’t matter if the FDIC only had 2 nickels on reserve. FDIC insurance is backed by the full faith and credit of the United States government. This means insured accounts are ultimately guaranteed by the Federal Reserve’s printing presses. Inflation risk aside, there are few safer bets in the financial world.

        Fear not.

      • Yartap

        September 9, 2013 at 8:42 PM

        Hello Again, Martins,

        I hear you, and agree; if we lived in a perfectly honest world. But we do not have a honest world.


        1. The Dodd-Frank Legislation requires Banks to pay a Bank’s Derivative Customers -First.

        2. “Full Faith and Credit” is NOT a sure thing! Faith means: Things unseen, but believed. Credit Means (from the Greek): “I believe.”

        3. This Full Faith and Credit of our gov-co has been down graded from AAA to AA by Standard and Poors; which now is in a law suit with our gov-co. as retaliation for the down-grading as claimed by S&P. S&P has announced that the Gov. Rating has improved – Hmmmmm. Did the retaliation work?

        4. FDIC was created in 1933 and will be backed up by the gov-co’s “Full Faith and Credit” and the Federal Reserve’s printing press? Martins are you implying that the gov-co will NOT break their own laws? So how is it that our government is still running even though they have exceeded their national debt limit as set by law, as we speak, and the government debt is reported as FROZEN -STOPPED – NOT GROWING – NO INTEREST CREATING PRINCIPLE! When in fact, it is still growing past the legal limits as set by Congress. DAMN – They are law breakers and Liars! Would they break that FDIC law, too? Don’t use your full faith in this government.

        But, Martens, even if they get the Fed Reserve to start the presses, which causes INFLATION, the value of the bank Depositors money become “pennies on the dollar,” due to devaluation. Either way – we cannot win.

        5. Now – this is just a question to think about: Could it be that the reason that Congress has not taken up a vote on the debt ceiling and the Treasury Dept. is lying about the TRUE national debt be because the Federal Reserve has told Congress and the Treasury that they cannot borrow any more from them? Are we in a gov-co. Matrix?

        I only fear God.

      • Martens

        September 9, 2013 at 10:12 PM

        Hi, Yartap.

        The payout priority imposed on the banks by Dodd-Frank has nothing to do with the FDIC’s payout priority.

        Insurance payments from the FDIC go directly to the depositors. Who the bank is paying doesn’t matter. All that matters is that the bank isn’t paying you, its depositor.

        “Martins are you implying that the gov-co will NOT break their own laws?”

        In this case, yes. Government employees usually do follow the law. Much of this blog is based on that premise. There is no compelling reason for the US government to not make good, when all that’s required is a run of the presses. And the political cost of reneging would be very high.

        “But, Martens, even if they get the Fed Reserve to start the presses, which causes INFLATION, the value of the bank Depositors money become “pennies on the dollar” due to devaluation.”

        This inflation happens wherever your money happens to be, in or out of the bank. It’s not a factor in deciding where to keep your FRNs.

        “I only fear God.”

        A wise policy.

      • Yartap

        September 10, 2013 at 2:42 PM

        Hey Martins,

        The Dodd-Frank Law does effect FDIC priority pay outs. A bank has to pay out to the derivative holders first, with the derivative pay out from bank funds removed, then FDIC has to pay out possible MORE from their funds to depositors. FDIC is an independent agency from gov-co. FDIC’s funding comes from member banks premium payments. The full faith and credit of the gov-co. does not apply without gov-co’s permission.

        The FDIC’s general fund stood at $53 billion in 2008, but today, it is estimated at $19 billion. There are three ways to increase the FDIC general fund: 1. Increase premiums of member banks, 2. Borrow money from member banks (this is what they have been doing, and the fund is dropping due to interest charges) and 3. Go beg Congress for more money (good luck, we have already done this with the big banker bailout). Any of these methods cost the customers or possibly the taxpayers in the long run, because the banks pass on the cost to customers.

        Will FDIC go broke? It is heading that way and fast. Even if the gov-co employees do their job, once the general fund runs out – GAME OVER!

        Just like Flood Insurance (another independent agency), there are limits on protection ($250,000.00/ named depositor). So, yes, it can be pennies on the dollar for many depositors like a stock brokerage firm.

        And yes I agree with you that if inflation/ printing is allowed and you keep your FRN’s even out of the bank they will devalue, but what if you put them into something else which may gain value?

  4. palani

    September 8, 2013 at 9:04 AM

    Derivatives are part and parcel of the communist plane. When private property is eliminated and you cannot own the thing itself then you are only left to own the derivative of that thing: the essence. The etymology of ‘derivative’ is derive. Perhaps acknowledgment of this new financial concept must be confined to a plane where it has meaning. In the plane of common law and private property derivative has no meaning because there is no need for such a concept. You are the owner and you have no need for even the concept.

  5. Adrian

    September 8, 2013 at 4:56 PM

    I think,before you adventure into this concept,you should get a good look at a future plan: Agenda 21. This is what the Globalist have in store for Planet Earth.

  6. Michael

    September 9, 2013 at 9:46 PM

    When the entire banking system is simplified you will find out its a game of Monopoly and that there is an end and only one person owns all, its was not invented on fiction, but what is in reality of a system that the whole world is involved in playing. Democracy allows criminals with the aim of greed to collect riches and the power to pay to keep out of jail to win in the game.

    We all teach our children to play the game to survive in this world of corruption and the better you understand the rules the more wealth you can accumulate by any means that are available to you, after all that one has to take the bull by horn and make it subject to our will and this is accolade as success and other praise this ability, and the whole purpose is to be a king of the jungle and to protect and destroy all who oppose them and to their continued existence and to produce more like them in their children who will inherent their kingdom.

    After finding the truth the world in ones eyes are no longer being blinded by ones own ignorance and of others who are scoffers in the last days of this age.

    Good slaves are always payed or bribed to do the biding of their masters and they become what is called the middle class, deaf, dumb and blind, like the three blind mice blinded to the truth of all things God has made, said, and was written about. See no evil, Hear no evil, Speak no evil. “this is a slave and a blind man in these end times, and if you cant see that we are in the end times then there is no hope but a fools hope in thinking its not real.

    The system is made by man, and all you need to know is don’t partake in it when they implement their mark, “for without it you cant buy or sell”. Remember for when they do and you accept, then your eternally dead in the dust and you have chosen your God of chaos to die a second death, and know their is no forgiveness and no pardon for you that do.

    You who are wise, and are not blind and know I speak the truth, then you who are will scoff at what I have written.


    • palani

      September 11, 2013 at 5:34 AM

      @ Michael “there is an end and only one person owns all”
      PERSON, 1)a word 2) an action 3)representation. A person is not flesh and blood but rather is one of these three things. Now the ACTION might be one of ownership … as in asserting sole right to the use and enjoyment of a thing. An example is a Pope from long ago proclaiming that the Church owns the entire Earth. The proclamation or bull creates a Person (The Church). I have no objection to this concept. Isn’t this a bit like the Hoover vacuum salesman ‘owning’ the territory that covers an entire State? Just says that no other Hoover vacuum salesman can come in and take over his territory and certainly contains no exclusivity over that same territory when other vacuum companies make the same proclamation. The Popes proclamation was for the purpose of ecclesiastic ‘sales’.

      “don’t partake in it when they implement their mark, “for without it you cant buy or sell” ”
      I haven’t bought or sold for many years. Seems to do so requires either paper notes or extension of credit. Using these instruments lead to making statements under penalty of perjury annually on official government forms. There are other ways to handle obtaining the use of objects needed for survival or entertainment. Predominantly the tools of agency and contract seem to work well to handle this situation. The tradeoff is a concept called ‘ownership’. As this term has a ‘…ship’ at the end I presume then that it is a maritime concept rather than a common law right. Things at sea sink frequently so ownership must involve risk as well. Risk then requires insurance which is also a maritime concept. Pretty soon after using all these principles taken from maritime law you get used to seeing shots taken at your bow.

      Say Bill Gates has succeeded in cornering the market on everything in the world. As a result he is valued at $100 trillion and ‘owns’ everything. You write a letter to him asking him what the definition of one dollar is and I am pretty sure he will have no answer that you cannot attack. For instance, say he responds that one dollar is an ounce of silver. You then ask him if he has 100 trillion ounces of silver stashed somewhere. I am pretty sure he won’t.

      Common law contracts used to be written with substance in mind. That substance was generally expressed as “one dollar and other valuable considerations”. One dollar was either gold or silver. The ‘other valuable considerations’ might be a million dollars in some other form (notes or credit) or could be a herd of pigs or the manure from the stable. Under common law you only need one dollar to engage in a contract. Anything more is excessive. No need to pay for the entire contract in gold or silver.


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