That’s a term you don’t hear much about now, but it is very important, because the recent failure of banks, were partly caused by derivatives. What is a derivative? Simply put, a derivative is a bet. If you go to Las Vegas, and you bet on where the cards closest to 21 will be, that’s a bet. If you play slots, and you bet on where the fruit will stop, that’s a bet. If you are a bank, and bet where the prime rate will stop, or real estate will peak, and bet on it, that is a derivative, and that’s why, among other reasons, the banks failed. Their colossal derivative investments with their depositor’s money failed, and depositors figured they’d better get theirs out, lest theirs went down also. The result? A bank “run,” causing depositors to take their money out, and with the bank’s cash gone, it failed.
Banks today, hold $177.6 trillion in derivatives, and that’s scary. I allow my bank to have as little as possible in my checking account and have never had a savings account. Why would anyone want a savings account, paying one percent interest, with inflation at 8%? Millions do. Barings Bank, a few years ago failed, when its president bet that the Japanese yen would go up, and it went down. He bet more on it going up, and finally the bank had lost $792 million, and failed.
Futures contracts, are similar to derivatives, but less chancy. Suppose you have a field of corn, and it looks pretty good. A corn buyer comes by, looks at your field, and tells you he’ll pay you a thousand dollars for all the corn in the field, when it ripens. You agree, because with this offer, you can show a profit. A “Futures Contract,” is drawn up. In the middle of the summer, a tornado strikes, and blows away 90% of the corn. The farmer wins, and the buyer loses. When a bank fails, the stockholders lose, but the depositors don’t, since the FDIC pays, even though it may have but a nickel on deposit for every hundred dollars of “insurance.” Recent bank failures, I am certain, depleted the fund’s account, and the printing press or computer entries were undoubtedly involved. The bank’s investments, usually in derivatives, failed, and caused depositors to panic and rush to remove their funds from the bank, and that was it. The bank was dead, and whoever takes it over, it will have a new name.
Speaking about printing presses or computer entries, today millions of Americans wonder if their Social Security is safe. It is…in dollars, and that’s our currency, isn’t it? Social Security isn’t in gold or silver. That’s your security, no matter what happens to the dollar, yen, peso, or ruble. As of today, the Russian ruble is worth a bit more than a U.S. penny. One point two pennies, to be exact. Imagine how many wheelbarrows of rubles it would take to buy a load of bread, here in America!
A derivative would be, if someone thought they were smart enough to make a bet on either the farmer or the buyer, which would multiply the gains or losses for either. To me, that derivative would be a dog that wouldn’t hunt, or a corn crop that wouldn’t grow, but banks now have $177.6 trillion invested in them. A bank’s failed investments in derivatives, and a ‘run’ taking its cash, killed it.
In America today, there is a debt of over $131 trillion, and naturally it will go higher, without any doubt. Imagine the mega tons of rubles it would take to buy it. That’s $94,000 per citizen, but our personal debts are much lower. Today, there is $1.5 trillion in auto debt, $5.62 trillion in real estate mortgages, and $250 billion in credit card debt, plus a few others. If our economy literally collapsed, and I think that is not in the near future, although things can happen quickly, if some unimaginable thing took place. If that happened, naturally the dollar would probably become worthless, and all debts would be losses to the lenders. The beneficiaries would be the holders of real money in the form of gold and silver, or useful tangibles such as food, clothes, a car, etc. A payment free insurance policy, is what metals and debt free tangibles are.
If there were a total collapse here, we would be the last to suffer. The weakest nations first, and down the line, finally with us. The chain has yet to begin. That could be decades, years, or months away, since no one knows what will happen in the next hour. Smart people plan for possibilities, and that’s why we have auto and fire insurance. I’ve never made an auto insurance claim in the 72 years I have been driving, but I have a big liability policy, because I don’t know what can happen in the near future.
There is talk in Texas, of issuing some money backed 100% by gold, and this is interesting, but they couldn’t use the word “Dollar,” as it is reserved for the buck, so a gold-backed Texas money might not be usable in a grocery store. Of what value are they then? A Texas paper money backed by 100% gold? Why not an ounce of real gold? Gold and Silver, with their purity and weight affixed on them, are true value everywhere, and no backing is needed, as would the Texas money require. In Texas, they are trying to figure who will hold the gold, will it be digital, etc. Who should care? With gold and silver in your hands or in your safe, you hold it and it isn’t ‘digital.’ Gold and silver, are instantly saleable, and no paper counterfeit is possible, as is possible with any paper promise, no matter what is printed on it.
The most famous derivative happened almost 400 years ago, and today it’s sort of laughable, but it wasn’t then, as fortunes vanished into thin air, just as any paper investment in anything can become worthless. In Holland in 1634, tulips became popular almost overnight. When these things happen, it’s usually over tangible things, like tulips, or real estate, or lumber a couple of years ago. Tulips were wildly popular and speculated upon. A single tulip bulb, could go for thousands of comparable dollars today. Within three years, it was over. The ‘bloom’ wore off, and those who bought derivatives betting the rage would continue, lost. Our yard in Colorado, has lots of beautiful tulips, and sometimes I look at them and think of Holland, almost 400 years ago.
Remember Sears Roebuck, Montgomery Ward, Blockbuster, Kodak, Gimbels, Pontiac and Oldsmobile? How about K-Mart? Mostly, their decline and stock going to zero, was the fault of management, and the stockholders were powerless to stop it. There are no ‘shares of stock,’ in physical gold and silver. You are the CEO and manager. If you’re old like me, (89) there’s no problem. We’ll just leave it to our kids, and they can fight over our 1887 home, which realtors are begging us to list for a million. No sale. Aren’t you glad spring is here?
Don Stott – don@coloradogold.com or 970-249-4646