Look at a simple example. You place a bet on a horse putting down ten pounds. This next day your horse's form looks better and so you are now in a position where you can sell the bet you placed for more than ten pounds. The point is that you have created, by virtue of your bet, a tradable item. Nothing has happened in the real world. The race will take place regardless of your "economic" activity. You have created a "capital" item where none existed before.
In the world of finance this is exactly what happens when a bank creates a derivative, except the banks can then do something you cannot do. The can use this "capital" as a monetary base for the creation of more money - ten and more times over. But there is yet another reason why derivatives are such a powerful way to create money. This is because they can be applied many times over to the same item in the real economy. It is the same with the horse you bet on. There is no limit to the number of bets a horse can carry.
One of the reasons why the Eurozone crisis is so dangerous is that the derivative contracts on European currencies are worth about 100 times the debts these countries have, simply because of multiple bets on the same thing. So derivatives will magnify the crisis to that amount. And who is holding those derivatives? Banks of course, with their balance sheets bloated by QE money. (Yes that is where a lot of it went.) Do they feel comfortable with all these bets? No problem, the 2008 crisis taught them that the government, i.e. the people, will always come to their rescue.
Crazy? It is the financial world we live in. And this is what lies behind that innocent sounding, neutral word: "markets". The money they have is a result of money created by gambling on economies and countries, and the means they have at their disposal for multiplying it.
And there is yet another killer blow. Doesn't gambling at least attract tax revenue for hard up governments? After all, you paid a hefty tax on that horse you bet on. Can it be tax free gambling? Well, of course. They're banks!
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
