[FoRK] August 2007 Update of The Second Great Depression
<jbone at place.org> on
Wed Aug 1 22:16:04 PDT 2007
On Aug 1, 2007, at 8:23 PM, Adam L Beberg wrote:
> Lion Kimbro wrote on 8/1/2007 5:43 PM:
>> On 8/1/07, Adam L Beberg <beberg at mithral.com> wrote:
>>> For example you can right now open a currency trading account and
>>> 100x margin i.e. the broker will loan you $99 for every $1, and that
>>> dollar could be a loan from a bank, and you're just Joe Public. Just
>>> imagine what professionals can think up.
>> Waaaiiit-a-second here, ...
>> Is that really **true?**
>> Are you sure?
> Yes. http://en.wikipedia.org/wiki/Retail_forex
> "While up to 4:1 leverage is available in equities and 20:1 in
> Futures, it is common to have 100:1 leverage in currencies; some
> forex market makers offer up to 400:1".
That's true, but the various leverage multiples you get by asset
class reflect fairly accurately the relative risks involved. With
forex you get much larger leverage because, frankly, the risk is a
whole lot lower; you've got mark-to-market risk for as long as you
carry a position, but the range in which this stuff moves is very
narrow --- prices tend to be quoted in pips or even 1/10ths of a pip.
Here's another thing that will blow your mind... most currency
trades settle through an organization called CLS Bank. One of CLS
Bank's primary functions is to eliminate a particular kind of
settlement risk called Herstatt risk. (Look this stuff up if you're
interested, it's actually quite fascinating; cf. the CLS Bank
website and Wikipedia for starting points.)
If it were the case that 100% of all currency trades globally cleared
through CLS, then the entire daily currency trade --- topping out
above $5T daily at peaks, these days --- could literally be settled
with $0 (principal) dollars changing hands. All that would be
exchanged would be the marginal mark-to-market profit or loss on the
trading --- far less than the total notional value.
All these big numbers sound very, very scary --- but one thing I've
learned over the last couple of years is that the whole global
economy is a lot more robust and the financial institutions that
support it a lot more risk-averse than you might think reading the
pop press. That's not to dismiss the Black Swan scenarios; but
really a panicky populace losing faith in the consensual
hallucination we call global economics is more dangerous than any
imagined fragility of the web-of-dependent-value created by all this
financial activity. Not everybody out there is a Mad Money Cramer
playing with the global financial well-being. (And those that are
--- aren't going to last long, and damage is sort of self-
compartmentalizing. For the most part. ;-)
That said, there are definitely macro-economic problems to be faced
in particular geographies.
Caveat lector... and disclaimer, these are personal musings rather
than professional punditry...
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