Cross-posted from The Horse You Rode In On
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?