by John Galt
June 23 2013 05:00 ET

In a fascinating report by the McKinsey Global Institute, “Financial Globalization: Retreat or Reset?” , the details of just how isolationist the international financial system has become could be a leading indicator as to why the burgeoning regional currency war could erupt into a global monetary conflict as it appears that cross border banking has crawled to a halt in the wake of the great crash and deleveraging started in 2008. The figures from this report are supported by one series of charts which terrify the banksters of the world and should keep the unprepared thinking about “what if” the system seizes up. This week was a brief, albeit serious, preview of what a total economic system collapse begins to look like to the average soul.

The first chart which is only updated through 2012 from the Bank for International Settlements (BIS) displays the total notional amount of derivatives outstanding in the over the counter market (OTC):

(Source: BIS Quarterly Report)

That’s right my fellow travelers, that total does in fact read:

$632,579,000,000,000 +

Yes, seriously, $632 trillion plus.

Thus when Ben Bernanke, the brilliant academic but steaming cow pile of a banker came out and did his duty this week by squatting on the investing public and dropping a deuce on the average moronic CNBCFBNBBBG viewer, well, is anyone really shocked that the world took a serious look at the policies of the Western banking system and investment masters and began to get nervous? It was this same type of figures as displayed above in 2007 and the same type of ignorance of financial reality which impaled the world economy in 2008 and damned near started a World War thanks to a series of cascading financial defaults which would have destroyed most of the corporate hierarchy on earth.

The biggest problems are usually the most obvious and rarely reported. This time the problem can be identified quite simply as a lack of trust which has major implications for the future of globalist capitalism as envisioned by the creation of the Chinese hybrid system with authoritarian controls and quasi-capitalist economic management of the financial systems. The currency fluctuations have major implications however and the two largest Western regions are indicating stress that could blow up and destroy the world economy in less than a week. The derivatives charts from the BIS display this risk quite clearly:

(Source: BIS Quarterly Report)

Between the European Union and United States there is over $336 trillion in derivative risk outstanding. This is a result of leveraged bets on both sides of the trade of which just a 5% failure rate would cause the entire world economy to spiral into total collapse. The lack of actual assets versus liquidity in one nation demonstrated the dangers to the system this week yet few individuals grasped the concept that the very interconnected economic system which has allowed a leveraged expansion based on credit would just as easily result in an implosion and massive contraction in real money, aka, a deflationary world wide depression, unless all sides work in concert to maintain financial systemic exchanges and flows of capital.

Unfortunately for the average schmuck who is not paying attention, this very key ingredient to averting a financial disaster has been contracting at a frightening pace since 2007.  With the combined risk of an uncontrolled deleveraging event along with an unsustainable loose monetary policy in those nations attempting a rational Keynesian debt reduction (Yes, it is an oxymoron), the chances for a minor financial error created by a remote or peripheral nation’s central bank could and would probably bring the entire Western banking system into a collapse scenario in very short order. The key is to pay attention to those indicators that warn everyone that a collapse is imminent.

Ambrose Evans-Pritchard grasped the gravity of the situation in Europe within the story from the at the link below:

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