[FoRK] August 2007 Update of The Second Great Depression

Jeff Bone <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  
>>> get
>>> 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...

jb
  

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