I haven't seen a thing about our rapidly collapsing world economy here, which has actually been pretty lovely, but it stays on my mind these days and wrecks my psyche something awful, so I'm taking it here to try to see what you guys and girls think.
To try for a brief summary - I don't tend to be that alarmist and have a remarkable faith in the ability of markets, people, and the world in general to rebound from all sorts of problems. But after having spent about a year learning about this crisis every way I can, now, I'm getting increasingly convinced that this really is going to be a disaster to rival the Depression.
The most alarming and concerning problem has to do with the financial derivative markets. For those who don't know, derivatives are various forms of investment securities and packages that "build on" traditional stocks and funds - which is to say, when you buy a derivative, you aren't actually buying a piece of any company or commodity in question, but are buying some sort of contract related to the performance of said companies or commodities.
Cutting to the chase, the value of the various sums that individuals and companies owe each other in the derivative markets is now TEN TIMES the estimated value of all of the real wealth in the world or more. (The value of the world's real assets is currently estimated at around $70 trillion in U.S. dollars, while the value of the various derivative contracts outstanding is estimated at anywhere from $700 trillion to over $1 quadrillion.)
In laymen's terms, this basically means the various investment banks, insurers, wealthy individuals, and hedge funds of the world have bet against each other to the tune of about ten times what everything else on the planet can reasonably said to be worth. Not all derivatives are bets, but in the recent bout of deregulation that the last decade saw, most of them have turned out to practically be that way.
As a result, they all adjusted their spending to what they thought their income from these contracts was going to be, and gave out CEO salaries and spent on lavish parties accordingly, which continues to eat up real assets at an alarming rate. But the "bet losers" are obviously going broke and bankrupt, and the winners of those bets, who ratcheted up bonuses and salaries according to what they thought they were going to receive from winning those bets, are now in danger of not receiving those payments after all, which means they're screwed too.
This doesn't actually mean that these companies are going to need ten times the value of everything in the world to fix their balance sheets, since most of them owe the money to each other. For instance, AIG has achieved a remarkable financial feat in that its various subsidiaries all owe each other tremendous sums of money, more or less making it the first company I know of in history to basically go bankrupt in part because it owes itself more than it can pay. I'm actually still working on the details on that one myself, but I don't think I have to explain to everyone that there's been some mismanagement involved there.
What it does mean, though, is that while the financial sector tries to figure out who owes each other what, all the bonuses and salaries and overhead that they agreed to pay back in the boom times are eating up anything of genuine value that they have left at an astonishing speed. And because those assets are getting eaten up so fast, they don't have the liquidity - money that isn't tied up in various forms of debt, basically - to actually cover their various debts to each other, which means they keep asking for loans from the taxpayers in the billions-to-trillions dollar range to make the payments on all this derivative gambling they've been doing. The liquidity required to make sure all these contracts get paid out might actually turn out to be more than the real value of everything else in the world, basically. Again, in layman's terms, that means the financial sector may literally try to bleed the rest of the world utterly dry just to figure out how to disentangle all the debts they owe to each other.
With all due respect to all the various bailouts and financial plans, if I had to make odds on the financial sector figuring this out without another wave of massive financial collapses, those odds would be low.
I'm actually starting to believe we may see something like 15% employment before this is all done - with all the attendant consequences of that unemployment. I don't think the actual damage in terms of numbers will be as bad as the Depression, but on the other hand, back during the Depression people were a lot more humble and used to economic hardship and had much more of a tendency to bear things stoically while waiting for things to get better. In these days of gangsta rap and generally more entitled behavior in general, I'm really starting to believe we might start seeing the mass riots and lack of governmental ability to enforce basic laws that some of the more pessimistic commentators have been predicting.
I'm curious to see what you all think, assuming anyone has time to actually read this essay. We certainly have enough people with accounting experience.
To try for a brief summary - I don't tend to be that alarmist and have a remarkable faith in the ability of markets, people, and the world in general to rebound from all sorts of problems. But after having spent about a year learning about this crisis every way I can, now, I'm getting increasingly convinced that this really is going to be a disaster to rival the Depression.
The most alarming and concerning problem has to do with the financial derivative markets. For those who don't know, derivatives are various forms of investment securities and packages that "build on" traditional stocks and funds - which is to say, when you buy a derivative, you aren't actually buying a piece of any company or commodity in question, but are buying some sort of contract related to the performance of said companies or commodities.
Cutting to the chase, the value of the various sums that individuals and companies owe each other in the derivative markets is now TEN TIMES the estimated value of all of the real wealth in the world or more. (The value of the world's real assets is currently estimated at around $70 trillion in U.S. dollars, while the value of the various derivative contracts outstanding is estimated at anywhere from $700 trillion to over $1 quadrillion.)
In laymen's terms, this basically means the various investment banks, insurers, wealthy individuals, and hedge funds of the world have bet against each other to the tune of about ten times what everything else on the planet can reasonably said to be worth. Not all derivatives are bets, but in the recent bout of deregulation that the last decade saw, most of them have turned out to practically be that way.
As a result, they all adjusted their spending to what they thought their income from these contracts was going to be, and gave out CEO salaries and spent on lavish parties accordingly, which continues to eat up real assets at an alarming rate. But the "bet losers" are obviously going broke and bankrupt, and the winners of those bets, who ratcheted up bonuses and salaries according to what they thought they were going to receive from winning those bets, are now in danger of not receiving those payments after all, which means they're screwed too.
This doesn't actually mean that these companies are going to need ten times the value of everything in the world to fix their balance sheets, since most of them owe the money to each other. For instance, AIG has achieved a remarkable financial feat in that its various subsidiaries all owe each other tremendous sums of money, more or less making it the first company I know of in history to basically go bankrupt in part because it owes itself more than it can pay. I'm actually still working on the details on that one myself, but I don't think I have to explain to everyone that there's been some mismanagement involved there.
What it does mean, though, is that while the financial sector tries to figure out who owes each other what, all the bonuses and salaries and overhead that they agreed to pay back in the boom times are eating up anything of genuine value that they have left at an astonishing speed. And because those assets are getting eaten up so fast, they don't have the liquidity - money that isn't tied up in various forms of debt, basically - to actually cover their various debts to each other, which means they keep asking for loans from the taxpayers in the billions-to-trillions dollar range to make the payments on all this derivative gambling they've been doing. The liquidity required to make sure all these contracts get paid out might actually turn out to be more than the real value of everything else in the world, basically. Again, in layman's terms, that means the financial sector may literally try to bleed the rest of the world utterly dry just to figure out how to disentangle all the debts they owe to each other.
With all due respect to all the various bailouts and financial plans, if I had to make odds on the financial sector figuring this out without another wave of massive financial collapses, those odds would be low.
I'm actually starting to believe we may see something like 15% employment before this is all done - with all the attendant consequences of that unemployment. I don't think the actual damage in terms of numbers will be as bad as the Depression, but on the other hand, back during the Depression people were a lot more humble and used to economic hardship and had much more of a tendency to bear things stoically while waiting for things to get better. In these days of gangsta rap and generally more entitled behavior in general, I'm really starting to believe we might start seeing the mass riots and lack of governmental ability to enforce basic laws that some of the more pessimistic commentators have been predicting.
I'm curious to see what you all think, assuming anyone has time to actually read this essay. We certainly have enough people with accounting experience.
