That is a good question about derivatives and one that has been bandied around a lot in the alternative press.

The argument the banks (originators of a very large share of the derivative market) is that once it is all net out, the exposure is much, much less.

The problem with that argument is, some of the counter parties will be able to settle and others will not. It only nets out if the parties are properly aligned so all the debtors and creditors end up being able to pay. And that is impossible.

Ag futures are not really much of a problem. They are marked to market each night, and if a counter party can not come up with the margin money, the naked ones show up really quick as the tide goes out. You end up with something like MF Global. Problem is, the vast majority of derivatives are off exchange. They are written in the shady underworld private market of banks, large insurance companies, etc. There is no mark to market. There is no knowing what counter party owes who or how far in the red they are............... till the tide does out. Then we may find that  rather than a few exchange derivative writers are naked, our TBTF banks are really, really, really, naked. On the order of perhaps hundreds to one naked.

Take a look at world GDP compared to the derivative figure given. Then ask yourself, who could write this much derivatives and have any chance of delivering what is promised should they be on the loosing side, Even half or a fourth of that figure.

It is a Ponzi scheme of Biblical proportions. If the banks win, they win big and huge bonuses for all involved. If they loose........................?????  We all loose.................. big.

It is a ticking time bomb. Either 1. the banks will end up owning it all (the 1% becomes the .001% and the rest of us are debt slaves) or 2. it all blows up.

I'm thinking 2. Or 1. and then 2.

John