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A Little-Known ‘Derivatives Debt Crisis’ Poses Threat to Entire Financial World

By Christopher Ruddy

Could the U.S. housing recession and recent events in the stock market be early warnings of something even worse to come?

Until recently, the U.S and global economies had been roaring. In the last two years, the Dow went up by a huge 30%, and many commodities are up by 20% to 50%. Also growth in several Asian countries—notably India and China—has been simply amazing, up by 9% to 12% a year. And until recently, real estate was also booming in many parts of this world, including the United States, Europe and Asia.

This broad-based global boom would be great news for everyone if it was the result of natural and sustainable market forces, such as a growth in savings and increasing economic innovation.

But is the mother of all financial disasters on the horizon?

Unfortunately, there is evidence that this global boom is anything but natural and sustainable, but is really the artificial result of a global liquidity bubble—
a bubble that could now be on the verge of bursting.

In this global bubble, literally hundreds of trillions of dollars in leveraged debt are at risk. It’s no secret that in today’s society, everyone from the family next door, to major corporations, to the U.S. government is deeply in debt. But while some debt statistics are widely reported, such as our $8 trillion national debt, other debt figures are never mentioned.

There has much discussion of Uncle Sam’s enormous, unfunded liabilities—including mandatory Social Security and Medicare payments, government and military pensions, interest on the national debt and other hidden-but-very-real government debt.

Altogether this debt totals an incredible $60 trillion to $65 trillion—or about $500,000 for every U.S. family. It’s doubtful these obligations will ever be paid and even the attempt to do so could plunge our economy into hyperinflation.

That’s scary enough and raises lots of reason for concern, as more Baby Boomers retire and this debt comes due. However, the above unfunded mandates are dwarfed by little-understood but truly colossal derivatives debt which now totals over $345 trillion—about nine times the Gross Domestic Product (GDP) of the entire world.


Derivatives are debt based on other debt. For example, banks commonly package groups of home mortgages together and sell this combined debt as Residential Mortgage Backed Securities (RMBS). Banks in Japan and China are major purchasers. Unfortunately, each time debt is repackaged and resold, it grows, in some cases exponentially creating an enormous, global pyramid of debt thousands of times greater than the value of the underlying assets.

Now the $345 trillion question is, “What happens if the underlying assets upon which all of this pyramiding debt is based decline in value?” Moreover, “who gets stuck holding the worthless hot potato of uncollectible debt?”

That’s not a trivial or unimportant question. If the assets that all of this debt are based upon ever fall, the entire global derivative debt pyramid would begin to collapse, potentially taking much of the world’s financial system along with it.

If you’ve never heard of derivatives before, join the crowd. Less than one person in 100 has ever heard of them, and even fewer understand them. But what you don’t know could destroy your finances, and what’s particularly worrisome is that the derivatives debt pyramid may have already begun to collapse.

Christopher Ruddy is the editor-in-chief and CEO of Newsmax magazine. For more information visit

(Issue #28, July 9, 2007)

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Updated June 30, 2007