Big Number Bingo
Alright, so you don’t have the biggest house or the biggest car on the block. At least you can have the biggest number.
I just found some behemoths, and they’re all yours.
There are now $750 TRILLION in derivatives sloshing around in the world’s financial system. How big is that? Well, the combined GDP of all the world’s countries – everything of value that earth produces in a year – is $45 trillion.
I don’t know how many football fields $750 trillion would fill, but I know how many it would buy – 3,750,000 NFL-style stadiums, complete with domes and skyboxes, at $200 million apiece.
As Stephen Jay Gould once remarked, we used to talk about astronomical numbers. Now they’re economical numbers.
You have to understand, most of those derivatives – options, futures, spreads, hedges, etc. – are two-party instruments. If a market or a currency rises or falls, somebody wins, somebody loses, and society as a whole breaks even. The system doesn’t collapse.
Unless – there’s a concentration of losers in one critical sector, like banking, hedging, or market clearing that makes the whole sector insolvent, so the world’s financial plumbing suddenly clogs.
Or, unless – the financial markets seize up in a spasm of uncertainty, afraid to risk a new loan or money transfer (as they almost did recently on the question of who was holding the bag on sub-prime mortgages) so the losers can’t get help, the winners can’t cash in – and everybody loses.
Or, unless – huge losses in one sector of the market strike fear in the hearts of bankers and traders, panic takes over, fist fights break out, and even the lifeboats hit icebergs.
Or, unless – there is some massive computer attack or accident (as many expected with Y2K) that loses or freezes or buries the data. Unlike claims on solid assets such as mortgages or equity shares, derivatives are mathematically ‘derived’ from other financial instruments, sometimes from other derivatives. They’re made of arithmetic: ratios of prices, ratios of other ratios and indices, and all as ephemeral as angels. Since their primary residence is in the computer, if that shuts down for a while, the Economy … our shared dream of who owns what … evaporates in a cloud of electronic amnesia.
But so what? A comet could strike the earth, the sun could explode, a tsunami could flood the bomb shelter you dug in your back yard, termites could undermine the cabin in the woods where you stashed your Spam and emergency guns. You could need a root canal.
And yet we’re still here. And we’re protected by the Endangered Species Act. Aren’t we?
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Where did that number come from? ($750 Trillion). That’s just staggering. $750 Trillion is something like 195+ BILLION pounds of Gold (and there are actually only about 309 MILLION pounds of the stuff on or in the planet), so the only way to represent that amount of money is by Information (or said differently, it exists only in the imagination of Man, and nowhere else).
Comment by Mark — September 19, 2007 @ 8:11 am
I’ve heard numbers over the past few years gradually rising into that range, from various sources (lately, it’s often been put at $500 trillion +). The immediate source for $750 trillion was Ron Insana on CNBC, in a discussion with their “chief economist” Steve Liesman. Of course the $750 trillion is “notional value,” and most of the derivative instruments are leveraged. The actual value of capital at risk is a few trillion, but I don’t have a current estimate of that number. Needless to say, it’s a murky and secretive world in which all such estimates are suspect. But it sure is BIG.
Comment by Al — September 19, 2007 @ 2:34 pm
When I was a kid, gumballs cost $.01. If you had a nickel, you could be a big shot. After I read this, I tried to figure out how many gumballs the alleged $750 trillion in derivitives would buy (with the price of each adjusted for inflation)and discovered a new way to create a headache in the pursuite of a meaningless goal.
Steve Alber
Comment by Steve Alber — September 26, 2007 @ 9:35 am
At least you tried, Steve. To most people a million is a billion is a trillion, and the only place they could imagine a trillion gum balls would be under the seats in a movie theater.
Comment by Al — September 26, 2007 @ 8:36 pm