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comment by blackbootz

There's a famous piece of journalism on the causes of the ~2008 financial crisis, specifically the housing bubble, called The Giant Pool of Money. There's one part that always stuck out to me, and seems incredibly relevant here, so I'll highlight it [emphasis mine, at the end]:

    Adam Davidson

    Right, the global pool of money, that's where our story begins. Most people don't think about it, but there's this huge pool of money out there, which is basically all the money the world is saving now-- insurance companies saving for a catastrophe, pension funds saving money for retirement, the Central Bank of England saving for whatever central banks save for, all the world's savings.

    Ceyla Pazarbasioglu

    A lot of money, it's about 70 trillion.

    Adam Davidson

    That's the head of capital market research at the International Monetary Fund, the place to go if you want to figure out how much money is in the world.

    [...]

    Adam Davidson

    And by the way, before you finance enthusiasts start writing any letters, we do know that $70 trillion technically refers to that subset of global savings called fixed income securities. Everyone else can just ignore what I just said. Let's put $70 trillion in perspective. Do this. Think about all the money that people spend everywhere in the world, everything you bought in the last year, all of it. Then add everything Bill Gates bought, and all the rice sold in China, and that fleet of planes Boeing just sold to South Korea, all the money spent in every country on Earth in a year. That is less than $70 trillion, less than the global pool of money.

    Alex Blumberg

    Wow.

    Adam Davidson

    We're talking about a lot of money.

    Alex Blumberg

    That is a lot of money.

    Adam Davidson

    And that money comes along with armies of very nervous men and women watching over the pool of money. Investment managers, they don't want to lose a penny of that. They don't want to lose any of that money, and, even more so, they want to make it grow bigger. But to make it grow, they have to find something to invest in.

    So, most of modern history, what they did was they bought really safe and, frankly, really boring investments like treasuries and municipal bonds, boring things. But then, right before our story starts, something changed, something happened to that global pool of money.

    Ceyla Pazarbasioglu

    This number doubled since 2000. In 2000 this was about $36 trillion.

    Adam Davidson

    So it took several hundred years for the world to get to $36 trillion. And then it took six years to get another $36 trillion.

    Ceyla Pazarbasioglu

    Yeah, there has been a very sharp increase.

    Adam Davidson

    How does the world get twice as much money to invest? There are lots of things that happen. But the main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it.

    China, for example, has over a $1 trillion in its central bank. And there are office buildings in Beijing filled with math geniuses, real math geniuses, looking for a place to invest it. And the world was not ready for all this new money. There is twice as much money looking for investments, but there are not twice as many good investments.




kleinbl00  ·  1165 days ago  ·  link  ·  

FYI: the US alone currently has about $12T in retirement accounts.

user-inactivated  ·  1165 days ago  ·  link  ·  

Yeah, but does that count? That money is being saved to be spent at a later date, so it's gonna go back into the economy eventually.

kleinbl00  ·  1165 days ago  ·  link  ·  

You misunderstand: it is the economy. Retirement funds are invested in the stock market. Just look at Reddit and all the people bitching that they can't buy BTC with their IRAs and 401ks - if it's in a retirement account it's abstract money. If you have to pull it out of your pocket it's the dearest thing in the world.

snoodog  ·  1165 days ago  ·  link  ·  

That's the problem though the amount of money doubled but the amount of global capital is roughly the same. There hasn't been any real inflation so there has to be a correction of some sort

blackbootz  ·  1165 days ago  ·  link  ·  

Woah, wait. This is bending my mind. You're saying that, though the nominal value has doubled, the total capital has stayed roughly the same, over the last ten or so years? Also, there hasn't been any real inflation? (I feel like the answer to one of these questions is the answer to the other.)

snoodog  ·  1165 days ago  ·  link  ·  

I guess if you look at 2000 and assume 4.5% capital growth then then you would get right around a doubling. At 4% its 18 years 3% 24. The real question is 4.5% realistic or is it a blip of an accounting gimmick. I would argue the latter but maybe kleinbl00 can chime in with a better answer. I dont have my copy of https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century at my desk to reference but I remember historic growth being surprisingly small on the order 1-2% maybe 3% in the last century.

blackbootz  ·  1164 days ago  ·  link  ·  

Well, the piece I linked to above claimed a doubling in 6-7 years in global fixed income securities. That's something like 10-12% growth a year. Which is.... insane. And a lot of that growth probably happened in the middle and latter years, reflecting the bonanza in the American residential mortgage market, so the growth in those years was probably even more. (I don't know what global fixed income securities is a subset of exactly.)

Something's gotta be wrong here, but, assuming these numbers are true, the only explanation I can fathom for that level of annual growth is the fairy tale fiction that became the on-the-ground reality: that housing prices would never go down. And when you take something like that as a baseline fact, then I can imagine some ridiculous levels of economic activity.

kleinbl00, am I getting something wrong here? I must be.

kleinbl00  ·  1164 days ago  ·  link  ·  

Derivatives are securities. So what's a derivative?

Let's say you have a house. It's worth X.

Let's say I decide to sell stock in the value of your house. It's worth X x Y, with Y being whatever the fuck I want it to be.

The underlying fundamental value of your house and the stock combined is X. However, the securities value of your house is X plus X x Y.

It's not as completely simple as that (you can't trade your house on the stock market... at least, if you're living in it) but options, futures contracts, derivatives, mortgage-backed securities, they're all securities. "Fixed income securities" are basically bonds, issued by bond issuers, backed by whatever the fuck they feel like backing it with. It's all just contracts.

blackbootz  ·  1164 days ago  ·  link  ·  

So we reached a worldwide doubling in fixed income securities (in 6 years) because wealth and fund managers went hog wild with derivatives and other financial instruments?

I forget who said it, but they said the last good financial instrument invented was the ATM. I know that's cheeky and simplistic, but derivatives seem to me to invite speculation.

edit: I think it was Paul Volcker.

kleinbl00  ·  1164 days ago  ·  link  ·  

"Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist."

- Ken Boulding, 1973

ButterflyEffect  ·  1164 days ago  ·  link  ·  
kleinbl00  ·  1164 days ago  ·  link  ·  

Ever read it? I've done the preface but then look squirrel.

ThurberMingus  ·  1164 days ago  ·  link  ·  

Well a minor correction is that doubling in 7 years is a14%/yr rate and 6 years is 16.5%.

blackbootz  ·  1164 days ago  ·  link  ·  

Well, by the math of the "rule of 72" where

  dt = 72/r
and I said dt (doubling time) = 6 or 7 and we're looking for the rate of doubling, our range for r is ~10.2%-12%.

Where'd you get 14% and 16.5%?

ThurberMingus  ·  1164 days ago  ·  link  ·  

That's embarrassing. I did some trial and error in a spreadsheet and I have no idea what mistake I made to get those numbers. You're right

blackbootz  ·  1165 days ago  ·  link  ·  

Are retirement accounts specifically tax-sheltered accounts? Or are any private investing funds considered retirement accounts?

kleinbl00  ·  1165 days ago  ·  link  ·  

It's anything in an annuity, pension, 401k or IRA.