Could the Derivatives Market Cause the Next Big Collapse?

I’ve been reading a lot about something that honestly troubles me greatly about the future of our still-fragile economy. It’s the derivatives market. Up until a few months ago, I, being a novice investor and person of modest financial means, was blissfully ignorant of what something called a derivative is.

I still honestly don’t grasp the concept of a derivative financial instrument completely, but I guess I should be comforted by knowing that most financial experts don’t even fully understand derivatives or how they function. I’m being sarcastic, that fact actually makes me even more nauseous…

Here’s the general definition of a derivative, in my own words. I suggest you go look it up on encyclopedia, investopedia, or wikipedia.com for a better definition if you’re interested. A derivative is basically a bet on what the future price of something will be. It can be a bet on the prices of homes, the prices of gold, the price of commodities, you name it.

What disturbs me most is the amount of derivatives that are out there. I’ve heard numbers something like this : 190 thousand dollars per every person in the world (yes, I said in the WORLD), many, many times over the GDP or Gross Domestic Product of the world (yes I said in the world again), and more disturbing numbers, figures and comparisons.

If you look at a chart, back in the mid eighties, derivatives were barely a blip on the scale. They didn’t represent numbers anywhere near what I just talked about. Now, the numbers have skyrocketed. Derivatives have caused a great many people to get wealthy, but on what merit? These financial instruments don’t create anything, they are basically created out of thin air, and they have absolutely no face value.

So what happens when people realize this and they are forced out of their positions? Will we have another crash, but way worse than the housing market one we are still climbing out of? Some people think so. Warren Buffett and George Soros have both been vocal about their doubts of the derivative market in the past, so that should tell you something right there when two billionaires fear this thing.

When will it all unravel? Are there any safe spots to have your money if they do? Unfortunately I’m not qualified to answer these questions, and I doubt anyone else is either, since no one knows what to expect from these volatile, questionable instruments.