Referred to as the atom bomb of finance by Warren Buffett, derivatives have a history of crashing the global economy. It was due to Lehman Brothers’ holding of derivatives that ultimately spelled their end and the decline of the housing market. Today, with an unfathomable derivates position surpassing 40 trillion dollars, the potential collapse of Deutsche Bank might be destined to send tremors across the financial world. In this article, we aim to explain what a derivative is, and the dangers that Deutsche Bank poses to the global economy.
By conceptualizing the function of derivatives in the stock market, the danger posed by Deutsche Bank becomes all the more clear. In layman’s terms, a derivative is securitized debt, that can be bought or sold. In 2008, Lehman Brothers held trillions worth of mortgaged back derivatives, resulting in bankruptcy when the housing market crashed. By understanding the current macroeconomic trend in regards to debt, it is clear to see that Deutsche Bank has not learned from Lehman’s mistakes.
Since the early 2000’s, the amount of debt issued by nations has ballooned. As of right now, 30-Year Eurozone Bonds are only paying out 1% interest annually. Ten-Year German Bonds are charging their purchaser -.47% annually to hold them. The pittance paid out by bonds proves why the European Union Model is completely unsustainable. Despite their best efforts to encourage capital investments in Europe’s economy, they have only chased the money away with high property taxes and negative interest rates.
The immense amount of deficit spending by politicians will soon come home to roost. In order to sustain the system, governments must either continue to issue and purchase more debt, destroying the purchasing power of their currency in the process, or default on the bonds they have issued. Deutsche Bank happens to be one of the largest holders of EU debt, with a position larger than the GDP of Germany. As politicians in Europe become more desperate to keep the system for imploding, Deutsche Bank’s derivatives position will only continue to decline in value, until there is nothing left to save.
Ultimately what is destined to happen in Europe, will come for America. The flight to quality will result in investors and speculators running towards the world’s last financial safe haven, U.S equities. However, with hyperinflation set to kick in within the coming months from QE infinity, the only way for the U.S government to salvage the purchasing power of the dollar is by raising interest rates. This will prove to be too much for most S&P 500 companies with inflated market values and junk balance sheets, and will result in defaults by companies, banks, and eventually Uncle Sam.