Debtor's Prison

Greetings fellow inmates,

In our first instalment of Count the Money! v1.0, we presented you with brief snapshots of the sizes of different markets we discuss in this forum.    As we said then, and repeat now, it is imperative in all rational analysis to have a good grasp of the magnitudes of the variables one is dealing with.   In economics and finance, there seems to be an established reticence to perform the simple task of counting the money as there is always a complex, “wonkish” or nefarious reason why size doesn’t matter.    In our opinion, many of these justifications are precisely the problem belying many of our largest systemic risks.   Take for example the oft-quoted notion that the nominal amount of debt outstanding is irrelevant since it can always be paid for by future growth.   Even while overlooking the deep philosophical problem of enslaving our futures for the sake of living grossly beyond our means now, we are struck by the sheer naiveté and pathetic self-delusion underlying this proposition.   A more specific example can be found a few years back when everyone believed that the size of the mortgage market was sustainable because housing prices always went up.   We all know how that ended.   Numbers do matter.  Ultimately, what we will attempt to do in this post is simply present you with raw data concerning the size of the most important markets so that we might all be well-versed in the magnitudes in econoGaia.   We are, after all, monkeys and the better we are at counting, the less prone we’ll be to getting hoodwinked by some technocrat or some other midnight cowboy.  

As usual in posts like this, we like to let the data speak for itself.  We will however, comment on some interesting tid-bits, trends, and other relationships that at times scream out from the data.   This post is more concerned with the current sizes of markets than with their recent evolution which, though very important, will be left for a future post.   The sources for the data are listed in each table/graph.   Though we try to stick to the most well-established and respected sources, we always advise you to look it up yourself and consider the nature and interests of the source.   As an addendum to this post, we will begin updating our section entitled The System, with broad outlines and fact-sheets on some of the most important institutions and mechanisms of our global economic infrastructure.    Without further ado, here are the Numbers.  

Here is the table in XLS format.  The source for the preceding table was the October IMF Global Financial Stability Report (IMF Oct 09 GFSR).    As opposed to Count the Money! v1.0, this contains data up until the end of 2008, rather than 2007.   Again, though this might seem a bit dated, it at least gives us a platform of comparison across the Great Credit Catastrophe (GCC) in addition to providing us with ballpark figures to inform our order of magnitudes.  It is important to note that all figures are given in USD terms, so we must take into account exchange rate movements for those figures that have a different inherent currency.   As a background when you read these numbers, remember that on a trade-weighted basis, the USD appreciated 9% in 2008, hence numbers that are originally reported in other currencies (like stock market caps) should be depressed by that additional amount. Several things to note from the table:

• According to the IMF, World GDP in 2008 was approximately $61tr, about an astounding 11% increase from 2007.    Not bad for a year of wanton economic destruction!   We do not understand this discrepancy with reality.   The most likely explanation is that the original 2007 data as reported earlier was preliminary and was revised upward.     For comparison’s sake, it is instructive to compare all other magnitudes with GDP, since it represents the actual output/production of an economy.   So keep this number in mind, $61tr, when you look at the rest of the numbers.
• Total global reserves as of 2008 stand at $6.79tr, up from $6.45tr in 2007.    This might seem surprising at first given the enormous amount of reserves many countries had to use to prop up their banking systems and economies.   However, this increase can be explained by the enormous amount of new sovereign debt that was issued in 2008 and was bought up by governments around the world.   In traditional economics, reserves are seen positively since they are in effect “savings” that can be used for a rainy day.    Of course, we vehemently support the notion that saving is better than borrowing.    However, one must consider the nature and form of those savings.   In this case, most of the reserves are in the form of government debt, primarily US debt.  Seen in this light, we are beginning to think that these reserves pose a large risk.   There will be a point when many of these sovereign “savers” will be left holding a pile of worthless paper.  The traditional view is that the value of these bonds doesn’t matter because countries tend to hold them until maturity.  OK, let’s assume that the average weighted duration of these reserves is 7 years; would you be willing to bet that in 7 years the US (and other reserve countries) will be able to pay off all their outstanding debt either through real economic growth or finding other suckers to loan them money to pay off the earlier Ponzi victims?  We wouldn’t!  We will post on this issue in the near future. 
• Stock markets around the world were decimated in 2008.  So much so that the capitalization of all stock markets in the world fell to $33tr in 2008, from $65tr in 2007.    In 2007, the world equity/GDP ratio was 1.2; in 2008, it was 0.54.   This is a quite a drop and, more significantly, the total value of exchange-traded equity went from being 20% larger than total world GDP to being a little more than half.   
• Private debt securities (ie, bonds) grew “modestly”, by almost $300bln, in 2008 to stand at nearly $52tr.    Public debt securities however grew significantly, by close to 10% to close 2008 at $31.666tr.   As we all know, this large growth in public debt was due to the “need” to stave off an imminent economic apocalypse, and is set to continue for the next few years.    All in all, public and private debt securities amount to a whopping $83.5tr, or about 36% more than total world GDP.   In other words, if every single person and company in the world worked as hard as they do now, and every single cent was used to service our debt, we would be able to pay off our bonds (this doesn’t take into account the loans held on banks’ balance sheets) in about 1 year and 4 months.   Not that long right?   Of course, this is an impossible scenario because that means we would not be able to use any money to buy food, water, electricity, etc and everyone would die.    Well, let’s be more realistic and imagine that every single person and company pledged 10% of their entire production (not income) to service the debt, then we could pay off the debt in about 14 years right?   Wrong!  If the nominal value of debt is growing at 10% a year (as sovereign debt is), then we’ll never pay it off.   This is the crudest form of a back-of-the envelope calculation which does not even contemplate inflation or compounding interest, but we just meant to illustrate a very important point:   the debt will NEVER be paid off.   Please suspend the devious economic platitudes springing up in your Keynesian mind right now, and think about this like a REAL HUMAN BEING.    We have reached a point where the debt will never be paid off; but this was always the nature of this global Ponzi game, and we shouldn’t be so surprised.   What we should be concerned about however, is that the growth curve of nominal debt with its associated interest is overtaking the real economic growth curve.   This disequilibrium point, which we will now call the Beginning of the End (BotE), is the moment the threshold will be reached when debt will always grow faster than our production.  If we assume the idiotic, god-forsaken argument that today’s debt can always be paid with the growth of tomorrow, then once BotE is reached it means that we will have become enslaved until the END OF TIMES.   If this isn’t enough to make you shiver down to your core and weep for the tragic grand delusion pervading our collective mind, then I salute you robot.   We will give you more detailed back of the envelope calculations on the BotE using our trusty abacus in a future post.
• It comes as no surprise to us that bank assets grew by $1.6tr during 2008, in spite of being largely to blame for the GCC.    The largest central banks, led by Uncle Benny, fell over themselves rushing to pump money into banks to prevent them from falling victims to their own making.   While Moms and Pops and GI Joes all over the world lost $32tr in the stock market in 2008, private banks made off with a nifty $1.6tr.  The current amount of $97.4tr of bank assets is 60% larger than total world GDP.    As a point of clarification, though these are labelled bank “assets”, they are in reality largely more debt since of course loans are counted as assets on banks’ balance sheets. 

The data in the following tables comes courtesy of the Bank for International Settlements (BIS).   This grand ol’ institution, though hardly household name, has the honor of being the first one featured in The System, which we advise you to check out if you are interested in learning more about this bastion of economic jurisprudence.    Here are the tables in XLS format.  

This table provides a bit more detail than the above on the global debt securities markets.   Rather than simply differentiating between public and private, here we see a breakdown between domestic and international securities, and their respective sub-categories.   In simple terms, “international debt securities” refer to those bonds that are issued and traded in a market outside of the domestic market of the issuers(borrower).   In other words, once a bond issued by an entity - be it a company, municipality, or government – whose domicile is the US, for example, is traded outside the US, it becomes an international security.   Therefore, one can think roughly of domestic debt as the net amount debt a country owes itself through its bonds.   International securities then represent mostly the debt owed cross-border.    A few things to note from the data:

• International securities total about $26tr, while domestic securities amount to approximately $59tr, or 31% and 69%, respectively.   As you might guess, international securities have been taking up a larger percentage of the total for these past few years, and we reckon this trend will continue for the following principal reason.   Governments and private entities alike have dug themselves into a hole where they need to continue borrowing to fuel their own growth and pay off older debt.   Having exhausted their own markets, developed countries need the rest of the world – the poor, developing third world – to continue financing their game of musical chairs.   Don’t forget, for all of the talk about the evil Chinese spurring global imbalances, it was the developed world that conned the developing world back in 1998 into thinking that they had to amass gargantuan reserves (by purchasing developed-market debt) to prevent their currencies from ever collapsing again.   “Hey baby, you got girlfriend in Vietnam? Me so horny.  Me love you long time!”
• The most sought-after bonds traded in international markets are US Treasuries (with $6.5tr), UK Gilts (with $3tr) and German bunds (with $2.9tr).   Little surprise there.   Big surprise five years from now!
• The entire country of China has only issued about $43billion of bonds traded internationally.   This is one of the main impediments to the Chinese Renmibi rising in value as we would all love it to.    It won’t be until there is a deep enough RMB-denominated international bond market that the RMB will rise as it should.   Unfortunately.
• International organizations like the IMF, World Bank, etc have a hefty $768bln of outstanding bonds, which must by definition be international since they don’t have a domestic market.     This is a very important number, and one that we will take a very close look at in the near future.   The reason for this importance is that we are bound to see it grow as supranational entities like these begin replacing some of the functions of the old sovereignties.  The supranational bond market will grow, and understanding how it will do so will be instrumental to elucidating the likely nature of the future global currency system to be implemented at a world near you.  
• Though the USD is the world’s reserve currency of choice, we see that EUR-denominated bonds are actually significantly more prevalent in international markets than USD-denominated ones.    On a large-enough scale, we don’t care about this distinction:  Uncle Benny, Uncle Merv, Shit-a-kawa and Jean-Claude, and the rest of the Group of 30 gang, are all playing the same tune for their masters.
• The $59tr of domestic debt is made up of 49% government issues, 39% financial issues and 12% corporate issues.

The following table lists the current account balances of the Ten Most Extreme Countries.   This will be the first table in a series entitled Top Ten Most Extreme Countries, which will feature the top champions and cowards amongst the sovereigns across a variety of economic and financial indicators.   We’d set up a fantasy league if we could, but it’s hard to keep stats in a game where yes means no, except of course when yes means maybe. (We haven’t decided yet whether Top Ten Most Extreme will be series of posts or rather a separate scoreboard; help us decide by leaving a comment!).   Anyway, back to the Numbers.   Remember that in a broad sense, the current account (CA) balance is a net measure of how much money a given country makes in a year; that is total exports minus total imports.   A positive CA means a country made more money than it spent, thus it saves.   A negative CA implies a country spent more than it made, thus it borrows.   

As expected, the usual gang of suspects make up the Top Ten Most Extreme CA countries.   China heads the savers with the largest CA surplus of $426bln, well ahead of second-place Deutschland with $235bln.   Five of the top ten savers have been rumoured, at times, to have been ill-received at many a polite get-together amongst civilized company in the West.    In total, the top ten CA countries exported $1.36tr in 2008.   On the other side of the spectrum, the United States of America (US – for short) makes a pathetic showing with a -706bln CA deficit, more than the other nine Top 10 countries combined.      Oh well, just another day at the office.   I guess I better write down my US bonds a little more now that there seems to be even less of a chance of them ever paying off their debts.    Four of the G7 countries, the 7 self-proclaimed most important countries, are amongst the top 10 biggest borrowers (largest CA deficits).   Brazil made its ignominious debut at this end of the table in 2008.    In total, the CA deficit of these ten borrowers comes to $1.24tr.

Lastly, we present to you two tables from the IMF Oct 09 GSFR which lists the sizes of the derivatives markets, both over-the-counter (OTC) and exchange traded.     A derivative, by definition, is a security that derives its value from something else, be it the price of another security or interest rates, for example.     Just in case you have not been confused enough by now as to what constitutes real wealth and real money, we present to you the derivative market sizes in full Technicolor. 

As of 12.31.08, the total size of the OTC market was $591tr.  Yes, you read it right.   This is subdivided into $418tr of interest-rate, $50tr of Forex, $6.5 of Equity, $4.4tr of Commodity and $42tr of Credit Default Swaps (CDSs).    For more up-to-date figures, check out our tables.  The OTC market is composed of all those contracts that are traded directly amongst individual counterparties, rather than through an exchange.   This makes them much more flexible, risky and unregulated.   The following table shows the notional values of the outstanding contracts, which represents the notional, nominal amount of the underlying reference securities.   In other words, if there is a OTC derivative on a $1bln bond, then the notional amount is $1bln, even though that is not necessarily what is at risk in the OTC derivative.  Notional amounts are usually belittled in the media, since they don’t represent the actual money at risk, or rather the Gross Market Value.  However, our point in showing this is to illustrate the idiosyncrasy of the world we live in; where our total liabilities already exceed our assets and we can still write financial contracts in amounts that are a full order of magnitude larger than our total global production.     What a house of cards we live in.   The great thing, fellow inmates, of being sequestered here in these dungeons is that unlike all the other poor folk rushing and clinging to the walls of that house, we don’t have to worry about plummeting to our deaths.   Shanking is our main concern!

The total value (market size) of exchange traded derivatives went down significantly from $79tr in 2007 to $55tr in Q1 2009, or about a 31% drop.    This is a lot steeper than the drop in the value of OTC derivatives, perhaps because they have much better pricing mechanism, having access to a real market. The following might be a crude approximation, but if OTC derivatives had gone down by the same percentage, they would have decreased by roughly $180bln, or about 3 times the total world GDP.   Geeze.   Throwing numbers around like that makes us feel like we’re playing marbles with some planets!

So, dear readers and fellow inmates, we have come to the conclusion of this little post.   We hope to have achieved our aim of providing you with some figures so that you might be more informed as to the sizes of markets that are instrumental to our economic freedom.   Moreover, we hope to have conveyed the deep conviction we hold that simply looking at magnitudes with a cold-rational-monkey-eye can be instrumental to a proper grounding in reality.   Numbers do matter, always, and they always will.    When the annals of humankind are written, our supercomputer progeny will look askance at these numbers and laugh.

May your capital be safe and your investments prosperous!

MAAA