1000000000000000
Why do I ask this question? Well let me answer that by asking you another question. How much is the Gross World Product (GWP)? (GWP = total gross world product = the value of everything we all together produce over a year). The IMF (and they should know) puts it at 72 trillion US$ at market exchange rates (see p 149 of the April 2013 IMF World Economic Outlook). That’s a lot. You also remember what brought the banks down back in 2008 (this weekend was the 5th anniversary of Lehman’s fall): the wonderful world of derivatives (like Credit Default Swaps) and too much exposure. The current estimates of the total global derivatives markets range from 700 trillion (estimate by The Economist in 2011) to 1,2 quadrillion US$. These are estimates because no-one really knows. Scary hu? Why does no one really know? Because derivatives are fictitious. It doesn’t really exist. It is not adding any value to the economy or the real world. I give you the Wikipedia definition which is clear enough: “A derivative is a financial instrument which derives its value from the value of underlying entities such as an asset, index, or interest rate—it has no intrinsic value in itself.”
Some claim however that these numbers are a gross exaggeration. In fact these derivatives “only” have a market value of 21 trillion US$.
A couple of remarks. Even if true, 21 trillion still is an enormous amount of non-existent value. But it isn't true. Last week the US Office of the Comptroller of the Currency published its quarterly report showing that just US banks hold 231 trillion $ in derivatives! JP Morgan is champion with 70 trillion$! The horror literature can be found here: http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq113.pdf
Secondly if the global derivatives market is 700 trillion and the “real” market value is 21 trillion, someone has used a rather big leverage... In fact the real value is only 3% of the total market (at the conservative estimate of 700 trillion). So what might you conclude? Well, when the derivatives market shrinks with a mere 3%, the complete underlying real value is wiped out and the whole system comes crumbling down on us. When this happens can we afford it? Well... no. The derivatives market is 10 times the value of everything humans produce during 1 year!
I was reminded of this by an interview I saw last weekend and a presentation. Throughout history numbers with 15 zero’s have not been uncommon to the man in the street. In November 1923, the American dollar was worth 4210500000000 German Mark (that’s 4,2105 trillion German Mark). So you needed 4210 of these notes to exchange them to 1 US$ (picture courtesy of Wikipedia):
Now, the presentation I saw gave some numbers of the very top rich, the 0,1%. These are quite fascinating and are for the US but the same happened all across the world:
1970 1% were worth 10% of national income
Today 1% are worth 20% of national income
Today 0,1% are worth 8% of national income
In 1992, the total Forbes 400 list (400 wealthiest people in US) represented a wealth of 300 billion US$.
Today this is 1,7 trillion US$.
What does this teach us? Get used to a lot of zeros. The richer are getting a lot richer, fast. Inequality is rising (fast). For the Taleb aficionados (like me) this is Extremistan to the extreme (and you know what happens next).
In other news, Dijsselbloem (head of the Eurogroup) spoke before his turn (again), when addressing the European Parliament week before last, stating Greece is in need of another rescue plan. The warning was taken over by the IMF and Moody’s last week. In the mean time almost unnoticed, Slovenia liquidated two banks (Pro Banka and Factor Banka). The Government seized the institutions to prevent what they fear could otherwise have been a deposit run. And the oldest bank in the world, Italian Monte Pascchi, is in critical need to raise 2,5 billion €. Commenting on Reuters one investment banker described the chances of success like this: "There is no chance on the planet that they can raise [this] in 12 months... they are heading towards nationalization”. The capital raise equals the current entire market value of the bank. So the Italian state is likely to have to come to the rescue which means a repeat of the Cyprus experience (remember that template-which-wasn’t-one “exceptional-case-that-will-never-be-repeated-again”). This also means that bondholders AND depositors would be drawn into a bail-in (for deposit holders above 100000,- €)! Also last week Dijsselbloem added that Europe should ensure bail-ins are done in the right way by states (to be understood as 'by confiscating depositors' savings'). See here for the EU’s law that will be adopted by year-end legitimising the bail-in principle based on the one-off-special-never-to-be-seen-again-case of Cyprus: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/137627.pdf
Over to some fun! Embrear posted this video about a floating book it sent to selected potential customers for its Lineage 1000. I would love to get a copy as well (no I am not in the market for a Lineage 1000).
As for the aviation part there is no contest with Virgin Galactic’s successful test flight demonstrating all technical mission phases in one single flight for the first time:
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