While trying to understand why Japan’s central bank decided to go with negative interest rates, I started looking at the connection to derivatives a lot more. Derivatives are a fundamental value figured by calculus. So what you have are mathematicians and physicists working in banks figuring these derivative rates using sophisticated algorithms. For people who may not be too familiar with what derivatives are, derivatives are simply casino-like bets by banks and other financial institutions like hedge funds and insurance companies, but they are bets on the direction of interest rates. Since banks and large institutions do the derivatives betting, inter-bank loans are an important part of derivatives.
I’m sort of wondering if the LIBOR (London Interbank Offered Rate) rigging several years ago was part of that institutional banking corruption. LIBOR underpins US$350 trillion in derivatives. If banking insiders can control the interest rates then they can rig the betting. Not one banker was indicted in the interest rate-rigging scandal. The Bank of Mitsubishi was caught up in the LIBOR scandal as well. There are only four banks in Japan that submit LIBOR rates and Mitsubishi is one those banks. The other form of derivatives is foreign exchange which Japanese banks are heavily involved with. According to the Bank for International Settlements (BIS**), “the preliminary global results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $5.3 trillion per day in April 2013.” More betting on the movement in value of foreign currencies. Becoming wealthy off buying and selling foreign currencies. With those types of profits why manufacture anything?
Let’s use Bank of America as an example. Bank of America thinks interest rates on Greek debt are going down while Deutsche Bank AG (Deutsche Bank AG is the largest foreign exchange dealer in the world) thinks the interest rates are going up, so these two banks place a bet. And that bet becomes a security like a stock or a bond. Then people bet on that bet and people bet on those bets and then others bet on those bets until there is this enormous pyramid that stands today at an estimated US$1.2 quadrillion worth of derivatives on planet earth. What it comes down to is a planetary crap game being conducted by major banks. There is no production going on here with derivatives. It is simply gambling. American banks hold US$227 trillion worth of these gambling bets called “derivatives.”
** BIS is the controlling central banking authority for all central banks including Japan’s central bank.