What is 'The pyramiding of intertwining contracts and abilities to pay'? Regarding the alarmingly rapid growth of derivatives, Buffett said there is no question in his mind that there exists the possibility of an explosive chain reaction with huge financial outcomes. Munger added that the derivatives market is bigger than the futures markets now and that to have money cascading in on people who sit in front of computer screens all day is a reliable source of craziness. The pyramiding of intertwining contracts and abilities to pay is very dangerous.
Sep 29, 2018 1:09 AM
Answers · 4
Buffet is suggesting that the current state of derivative markets may be like a pyramid scheme. Google "pyramid scheme" if you don't know what that is.
September 29, 2018
I do not know the souirce material, so I could be wrong, but I take it differently at first read. Rather than the strict sense of a pyramid scheme where there is nothing real behind the scheme, excpet increasing numbers of investors I suspect they refer to that large numbers rely, directly or indirectly, on a few. I would read "pyramiding " to mean that others rely on things that have gone before, or put in place before, in increasing numbers. He refers to "intertwining contracts and abilities to pay". I suspect the problem is that if one or afew go sour, fail in some wway, it affects the ability to pay of many others. This causes a cascade of failures, defaults, which increases. An increasing effect on the market in general, results from potentaiily small beginings. Just from the language, without economics insight. So may be wrong.
September 29, 2018
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