By June 2008, the International Swaps and Derivatives Association, or ISDA - the association of companies dealing in this stuff - was estimating the total size of the [derivatives] market as $54 trillion, close to the total GDP of the planet and many times more valuable than the total number of all the stocks and shares traded in the world.
That terrifies me, because derivatives are entirely artificial. They just made them up because they wanted new financial products. Meanwhile, the GDP of the planet is real. It's the money we make for doing our jobs, the money our employers make from selling the products and services we produce, the money we spend on our rent and groceries and cough syrup and haircuts. And yet, this entirely artificial thing that fucked up the global economy was close to being bigger than anything real!
And, since the derivatives market was many times more valuable than all the stocks and shares in the world, this meant that the portion of financial work that comes close to touching on reality was utterly marginalized in favour of this wholly artificial creation.
And, with it, they managed to fuck up the global economy.
How can those of us who have to live in reality, and make and buy and do real things, possibly feel safe?
2 comments:
I believe the only reason that the world economy doesn't collapse on this is that the derivatives market is not based on the current market but on value over time. Thus the world's GDP (being a one-year summary of the world's production) doesn't easily compare to the derivatives market.
In the same way, the price of a company's stock is often based on what speculators think a company will be worth, rather than on its current assets and the current year's sales. When that speculation turns out to be false, it's often cataclysmic for the stock (e.g. Nortel, RIM).
So the valuation of the derivatives market is not a completely illogical thing. Is it a scary thing? Yes, indeed it is.
the price of a company's stock is often based on what speculators think a company will be worth, rather than on its current assets and the current year's sales.
Whenever you hear the expression "mark to market," know that you are dealing with fiction.
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