Has the Derivatives Volcano Already Begun to Erupt?

• Has the Derivatives Volcano Already Begun to Erupt?
  by DAVID P. GOLDMAN, http://www.atimes.com/
  The risk remains that dollar credit will seize up globally, with disastrous consequences for countries that have to borrow dollars to cover deficits.
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  The cure for the last crisis always turns into the cause of the next one. The economies of southern Europe – Greece, Italy, Spain and Portugal – nearly collapsed in 2011, and Europe’s monetary authorities responded with negative interest rates.
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  So did Japan. Europeans and Japanese pay to hold cash or own 10-year German government bonds, which means that every pension fund and insurer will fold in a finite time horizon. They responded by exporting more, saving more, and buying American assets that still pay a positive, if low, real yield.
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  Hedging the foreign exchange risk in this half-trillion-dollar per year business has exhausted the balance sheet of the global banking system. That explains a large part of the jump in the US 10-year note yield to 3.2% last Friday from 2.85% in early September. Hedging the foreign exchange risk in these massive flows created a derivatives mountain, and it has started to spew smoke and lava.
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