Why Bitcoin&Co. are by far not the biggest issue in our global financial system

In my newsfeed now and then the following chart pops up which comes, according to my research, from the US-American website HowMuch.net and shows how much money there is in the world and in which „aggregate states“ this money is available – see: https://howmuch.net/articles/worlds-money-in-perspective. According to my understanding, the figures shown in this chart represent the status in 2015, which means the figures outdated. However, in a minute we will have a look at up-to-date figures from another source.

 

Note: I ask for your indulgence that I use the term „money“ or „amount of money in supply“ in the following synonymously to „capital“, even if this is not 100% correct.

Since the figure of $83.6 trillion for the total amount of money on our planet mentioned in the chart above seemed very low to me, I double checked it and came across the US website of „The Money Project“, which has set itself the task of visualizing data and facts about money in a catchy and comprehensible way.

On this website, there is an article from October 2017 under the headline „All of the World’s Money and Markets in one Visualization“ with a chart containing some fairly astonishing data on the global money supply (see: http://money.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization/).

The data in this „The Money Project“ article was updated on October 26, 2017 (the original article was published on December 17, 2015) and from my point of view the dimensions of the „aggregate states“on which money or capital is distributed across our planet Earth are surprising, if not even frightening.

According to „The Money Project“, global capital was distributed as follows in 2017:

1. Total value of worldwide (already mined) silver inventories which amount to 1.0 billion oz or 31,250 tonnes = $17 billion (based on a $17/oz spot price)
2. Total market capitalization of all cryptocurrencies in October 2017 = $173 billion (Note: The market capitalization of all cryptocurrencies in the world is rapidly changing, it almost doubled from October to November 2017 – the most recent market capitalization with a breakdown of all cryptocurrencies is reported at https://coinmarketcap.coms)
3. Market capitalization of Apple as the world’s most valuable public company in 2017 = $807 billion (currently moving up to $1 trillion)
4. The combined fortune of the world’s 50 richest people in 2017 = $1.9 trillion (including Bill Gates with $89 billion, Jeff Bezos with $84 billion, Warren Buffet with $81 billion)
5. Balance sheet totals of the US Federal Reserve (Fed) and the European Central Bank (ECB) = approximately $4.5 trillion each (Note: Between 2008 and 2016, the balance sheet totals of the Fed and the ECB multiplied by heavily disputed quantitative leasing (QE) programmes, which were used to purchase government and corporate bonds – just the ECB purchased between March 2015 and December 2017 bonds in a magnitude of $2,75 trillion).
6. Total value of all coins and banknotes in the world = $7.6 trillion
7. Total value of global (already mined) gold reserves which amount to 5,99 billion oz or 187,200 tonnes = $7.7 trillion (based on a $1,275/oz spot price)
8. Total value of the world’s (easily accessible) „narrow money“ including coins, banknotes and checking account balances = $36.8 trillion
9. Market capitalization of all of the world’s stock markets = $73 trillion of which 38% are allocated to the U.S., 11% to the Euro Zone, 5% to the UK, 10% to China, 7% to Japan, and 29% in the rest of the world (note: the portion of China jumped from 2% in 2015 to 10% in 2017, whereas the portion of the U.S. dropped from 52% in 2015 to 38% in 2017)
10. Total value of the world’s „broad money“ including coins, banknotes, current account balances and long-term deposits in savings or fixed-term deposit accounts = $90.4 trillion (note: 8% of the global money supply are physical and 92% non-physical)
11. Total value of global debt = $215 trillion which is equivalent to 325% of global GDP (note: $70 trillion of world debt which translates into 33% was added in the last decade alone) including $69 trillion public/government debt (most recent figures with breakdown per country see: https://www.nationaldebtclocks.org)
12. Total estimated value of all developed real estate in the world (including residential property, offices, retail space, hotels, industrial land, agricultural land, as well as other commercial uses) = $217 trillion (note: 21% of the world’s total residential asset value is in North America – despite the fact that only 5% of the population lives there, whereas Europe contains 24% of asset value but only houses 11% of the population)
13. Total value of global derivatives, i.e. contracts between two or more parties, that derive their value from the performance of an underlying asset, index or entity (examples for derivatives are: Futures contracts, Forward contracts, Options, Warrants, Swaps) = $544 trillion to $1.2 quadrillion

For those of you who do not have to deal with billions, trillions or even quadrillions of US-$ every day, I have here a comparison which illustrates the shocking dimension of the figures: One trillion is a „one“ with twelve zeros and one quadrillion is a „one“ with fifteen zeros. Stacking four billion 500 US-$ bills on top of each other (equivalent to the equivalent of 2 trillion €), the money pile reaches the height of the ISS space station orbiting the Earth at a distance of about 400 kilometers above the surface of the Earth. Guess how high a money pile representing $544 trillion to $1.2 quadrillion will be (little hint: we will end up somewhere half way from Earth to the Moon).

„Collateralized Debt Obligations (CDOs)“ and „Credit Default Swaps (CDS)“ are two derivative types, which became famous as the main cause of the last global financial crisis from 2008 onwards. They were described by Warren Buffet already in 2003 as „financial weapons of mass destruction“ for good reasons.

The majority of derivatives is traded between private investors outside of stock exchanges as so-called „over-the-counter (OTC)“ trades. As a result, the overall system of derivatives trading with its inherent risks is widely non-transparent to governments, central banks and regulators. Regulatory authorities are not able to monitor or control the flows of values and risks arising from trading in derivatives.

Many financial professionals see trading in derivatives as a „zero-sum game“, since there is a winner and a loser for each bet (and nothing else then a bet are derivatives). In spite of this, however, the sheer size of the overall system alone bears unforeseeable risks for the global financial system and subsequent for the taxpayers.

Based on the average between the lowest and highest estimate for the total value of global derivatives in 2017 – i. e. $872 trillion – the total value of global derivatives is almost 10 times the value of the world’s „broad money“ (including coins, banknotes, current account balances and long-term deposits in savings or fixed-term deposit accounts), or even almost 12 times the market capitalization of the world’s combined stock markets.

Over the past 45 years the global financial industry has caused far too many immoral, asocial or even illegal incidents with a strong negative impact on the real economy. In many cases, the taxpayers had to pay the bill for it. A selection of most important examples is provided in my blog published on February 25, 2017 under the headline „Why the global financial industry must be regulated and enchained“: https://kubraconsult.blog/2017/02/25/why-the-global-financial-industry-must-be-regulated-and-enchained/.

The following citation is take from this blog:

„In this context it is important to know, that almost all of the major instruments for short-term speculations or other financial manipulations with negative impact on our societies have been invented, introduced or at least misused and perverted in course of the last 45 years as consequence of fateful deregulations approved by the US-Presidents Carter, Reagan, George Bush, Clinton and George W. Bush and various political leaders in Europe (e.g. Margret Thatcher, John Major, Tony Blair, Helmut Kohl, Gerhard Schröder).

The financial industry utilized the massively expanded leeway provided by these deregulations by introducing, upgrading or broadening various instruments for short-term speculations or other financial manipulations such as high-frequency trading, short-selling, hedging, speculations with commodities or against currencies based on long and short equity models, Credit Default Swaps (CDS), Asset Backed Securities (ABS) including Collateralized Debt Obligations (CDO), tax-avoiding transactions with Offshore Centers and so on …

All the listed instruments are neither God-given, nor will the global financial system collapse if these instruments become strictly regulated or even prohibited. In contradiction: A significant simplification of the global financial system and its instruments in combination with a harmonization and simplification of our tax systems will have a healthy and positive effect on our global economy. Our global economy should by no means be a playground for unscrupulous gamblers and bettors. People, who want to gamble and bet, should satisfy their lucid drive in a gambling house with their own money and at their own risk and not at the account of taxpayers.

The experience of the last 45 years (with Richard Nixon’s colossal error to severing the final link between the dollar and gold in 1971 as starting point) shows that the financial industry is neither willing, nor able to fulfill these requirements on a voluntary basis. Instead the financial industry needs to be effectively enchained by governments and regulatory bodies, which are not infiltrated or corrupted by lobbyists – and the chains need to be as strong as possible.

The British journalist and novelist John Lanchester („The Capital“) said in 2012: „The financial system in its current condition poses an existential threat to Western democracy far exceeding any terrorist threat. No democracy has ever been destabilized by terrorism, but if the cashpoints stopped giving out money, it would be an event on a scale that would put the currently constituted democratic states at risk of collapse.“

It’s high time for a change …“

END OF CITATION

Simply by looking at the relations between a market capitalization of $305 billion for all crypto currencies (effective November 28, 2017), the total value of global debt of $215 trillion (which is equivalent to 325% of global GDP) and an estimated value of $544 trillion to $1.2 quadrillion for all derivatives at planet earth it should become very clear to everybody that Bitcoin and other cryptocurrencies are certainly not the biggest issue in our global financial system.

The problem becomes even clearer in relation to the economic strength of the four largest economies: the gross domestic product (GDP) of the USA was USD 18.6 trillion in 2016, China’s GDP USD 11.2 trillion, Japan’s GDP USD 4.9 trillion and Germany’s GDP USD 3.4 trillion (see: https://tradingeconomics.com). GDP is defined as the total value of everything produced by all the people and companies in a country. It doesn’t matter if they are citizens or foreign-owned companies. If they are located within the country’s boundaries, the government counts their production as GDP.

The good thing about Bitcoin&Co. is that they encourage people to turn their brains on and finally critically question the dubious activity of the global financial industry including central banks, e. g. with regard to the real value of conventional FIAT currencies after the abolition of gold coverage (FIAT currency = currency whose acceptance is governed solely by legal regulations and based on the confidence of users), with regard to the antisocial bond purchasing programmes of Fed and ECB by means of funds from the printing press leading to redistribution of assets for the benefit of the rich and to the detriment of the poor, with regard to the unhealthy magnitude of private and particularly public debt, or with regard to the gigantic financial bets with derivatives in an insane volume, which causes considerable risks for the global financial system. 

P.S.:

A chart provided by Statista in 2017 (see: https://www.statista.com/statistics/272258/percentage-of-shareholders-in-the-total-population-of-selected-countries/) shows, that the percentage of stockholders in the general population of major developed countries varies between 5.6% in Germany and 30% in the Netherlands (the U.S. are in-between at 25,4%). Compared to these figures, the number of people, who own cryptocurrencies is still tiny: The number of Blockchain wallets has been growing since the creation of the Bitcoin in 2009 to approx. 15 million in September 2017 (see: https://www.statista.com/statistics/647374/worldwide-blockchain-wallet-users/). Particularly in 2017 the number of Blockchain wallets has been growing rapidly to approx. 19.250 million on November 28, 2017 – as this supplementary chart provided by Blockchain.info shows (see: https://blockchain.info/de/charts/my-wallet-n-users). However, since one Blockchain user has usually more than one Blockchain wallet (due to security reasons) and since there are a lot of inactive Blockchain wallets in place, the number of people, who own Bitcoin is most likely still far below 10 million – compared to approx. 82 million US-American stockholders.

If you would like to understand the basics of cryptocurrencies, I could recommend the following two blogs:

• „A letter to Jamie Dimon – and anyone else still struggling to understand cryptocurrencies“ published on November 26, 2017: https://kubraconsult.blog/2017/11/27/a-letter-to-jamie-dimon-and-anyone-else-still-struggling-to-understand-cryptocurrencies/
• „The most important facts and milestones on Bitcoin and Blockchains“ published on August 27, 2017: https://kubraconsult.blog/2017/08/27/the-most-important-facts-and-milestones-of-bitcoin-and-blockchains/