Maybe W Can This
Submitted by AM on Mon, 07/12/2010 - 19:18
Are we serious?
Total global wealth stands at $125 trillion, more or less. The total world market for financial derivatives stands at $700 trillion. Does anyone else see something terribly wrong with this picture?
This is from an IT column not that i read to bond with the IT folk here at Hechtmail, but because it has so many insights into life and the way the world works.
You can read the whole column here, complete with hyperlinks:
http://www.issurvivor.com/ i am referring to the 20100712 column.
I buy a house that is worth
I buy a house that is worth $500K.
Total wealth $500K
I take out a $400K mortgage. The total wealth involved is still $500K, I have $400K in cash and $100K equity in the house.
Somebody decides they don't want to hold a fixed rate mortgage from me so they swap their interest in the mortgage and have a floating rate instrument.
When you think of a swap, think about what you are neutral about.
Which would you rather have $0.92 today or $1 on 12/12/12?
Pretend you would rather have the $0.92 today. OK, how about $0.91? Now, you don't care. therefore, you would be willing to enter into a swap where you got more than $0.91 today or more than $1 on 12/12/12.
Anyway, after the lender swaps the fixed rate mortgage to a floating rate mortgage we still have $500K of wealth.
However, you owe $400K mortgage and someone has a fixed rate mortgage for $400K and two people have opposite ends of a swap of $400K notional value.
So the total derivates are already at $800K for a $400K mortgage. Every time they slice and dice, the notional value increases.
I am actually surprised it is less than 6 times total wealth.
When we did a lease, we STARTED with 160% of the cost of the asset. The people on the other side probably made a few trades to double or triple the 80% they held.