We are staring into an economic black hole. Where is the bottom?

I previously mentioned $500 trillion in derivitive instruments casting their shadow over the markets; I now see that one expert pins the number at $750 trillion. To put that number in perspective, realize that the annual GDP of the entire world is around $50 trillion. Thus an economic distortion of unimaginable magnititude is staring us in the face.

The Fed and other central banks are slashing rates and pumping liquidity in panic mode. Why the panic? Unemployment claims are actually down at this point, and jobless masses are not rioting in the streets - yet. The equity markets took a hit since the first of the year - but that alone is faint cause for panic.

So, what do the central bankers and policymakers see that has put such fear in their eyes? A black hole?

These are the hard facts - now for sone intuitive analysis.

The derivitive bubble is like a cancer, silently eating away a vital organs until detected far too late. I don't claim to understand them, and suspect that few really do. We are talking about financial instruments so complex that risks can be hidden and intrinsic value can be nearly impossible to compute.

In simpler times, when people and institutions invested in stock and bonds, tangible value was easy to measure and assess. Investments were based on relatively solid value. You could lose money, but stock prices generally rise or fall based on openly observable events and conditions. The ledgers of every puplicly traded corporation are available for all to inspect. Except for cases of ourtright fraud and deception (like Enron), there are generally no serious surprises in the performance of stocks and bonds.

With todays' complex array of hedge funds and collateralized debt securities, it's possible to invest one's money in abscence of value (debt) rather than something of value. Sure, traditional bonds are a type of debt, but traditional low-risk bonds have a strong and visible backing behind them. If bonds are risky, this is openly acknowledged, and investors can weigh the prospects.

In contrast, many of the toxic derivitives are rolled up in complex form where it's difficult to trace the underlying source of backing. If they are issued by reputable brokerage firms, they may carry a good rating, and that's precisely how they found their way into so many portfolios. Imagine the surprise that is unfolding now...

As long as the bubble expanded, the cancer could grow in obscurity. However, with the bubble now bursting and liquidity drying up, the day of reckoning has arrived. This is happening all over the world right now - investors and fund managers are frantically trying to compute what their assets are really worth.

It may take a total collapse into depression in order to clean out the economic malignancy. Hopefully the chaos will not lead to a fascist usurpation of freedom. Hopefully, compassionate and sensible political leadership will arise. Hopefully, from the ashes will emerge a more just and equitable economic and political system.

And speaking of politics - isn't it a bit odd that none of the presidential candidates has seriously addressed the approaching storm? This is surreal.