The Bank for International Settlements (BIS) has reported that the total clot of global derivatives in existence is now $415.2 trillion, with comes out to 789% of global GDP.
In typical Mogambo parlance, grubby financial bets financed by banks and the financial services industry now total almost eight times the value of every freaking good and service produced on the entire freaking planet in an entire freaking year!
And according to the McKinsey Global Institute, the ratio of global financial assets to annual global output soared from 109% in 1980 to 316% in 2005!
I scream "Gaaaaahhhh!" All of this central bank idiocy of creating more and more money and credit is not news to Jason Hommel of the silverstockreport.com, but a grown man screaming "Gaaaaaahhhh!" at the top of his voice seems to be startlingly novel, judging by his reaction.
Nevertheless, he writes, "Money in U.S. banks, M3, is growing at a rate of about 12% per year, or more. So, in the last 12 months, it grew by about $1.3 trillion dollars, which is $1,300 billion dollars."
So why is a guy who is primarily interested in precious metals talking about the growth of the money supply? Well, we learn why when he wonders aloud how much the 2,500 tonnes of annual world gold production (80 million ounces) is worth at $675 per ounce.
I immediately started sweating bullets, thinking that I was certainly not expecting a damned pop quiz in math, especially one multiplying such large numbers. So I breathe a huge sigh of relief when I learn that he already did the math, and says, "It's worth only $54 billion dollars."
Then he stops and looks at me with this expectant expression on his face, like I am supposed to draw some important conclusion from this or something, but I am sitting there with this big, dumb look on my stupid face, as I don't get it. Sensing my problem, Mr. Hommel helpfully reiterates the facts by saying "$1300 billion of new money printed. $54 billion dollars worth of new gold mined, at $675/oz."
Obviously, this is supposed to mean something to me, but it doesn't. Again, I just sit there, dumbfounded, feeling uncomfortable and trying to look small so that maybe he won't see me.
After what seemed an eternity, he finally got tired of waiting for me to show some uncharacteristic smarts, and just tells me what this means. "So," he says, "the U.S. is actually creating new paper money at a rate 24 times as much as new gold. 1300 / 54 = 24!"
I say, "That's a lot! And thanks a lot!" as I get up to leave in case this breaks out into more math, as I have enough problems as it is, no pun intended. But he is not done with me yet, and grabs my attention with "And of course, this is hardly a fair comparison. I'm comparing U.S. dollars to world gold production. We should compare total world paper money creation rates, to world gold mining rates."
Intrigued, I sit back down to learn more about how much money the world is creating versus how much gold. Then he says, "But that's a lot of work, and I don't know if I can source it all out."
As soon as I heard the word "work" and how he was "sourcing this out", I was instantly scrambling to get the hell out of there. But again, before I could get more than a few yards towards the door in my panic, he lets me know that he was merely toying with me by saying he has, again, already done the work, and, "My well-researched guess is that the U.S. dollar is only about 1/4 of the world total increase of paper money. So, let's multiply by a factor of 4."
By this time I am lost again, and realize that by this time I had forgotten what in the hell he was even talking about in the first place. Again I was saved when he laid it all out in front of me with "$1,300 x 4 / 54 = 96! Thus, the world is creating new money at about a rate nearly 100 times faster than the world's value of new gold." A hundred times more money than gold!
Wow! Finally, a light bulb, albeit low-wattage, goes on over my head! The amount of gold per unit of currency is rapidly falling to record levels, all over the globe, indicating that gold is a Big, Big, Super Big Bargain (BBSBB) right now, and getting more so every day, and for everybody on the planet!
Now you know why I am always screeching that gold will soar, as the dollar is just another of the world's disastrous experiments with a fiat money and unrestrained fractional reserve banking, meaning that it will go to zero in buying power, or (in the original Latin), magnus squatus profundus. And now it is happening all over the world, as we all use fiat currencies!
The fact that gold is not rising in price right now makes me Squeal With Glee (SWG) "Whee! A chance to buy more gold, and at prices effectively cheaper by the minute!"
But gold is so alien to most people that even when you are screaming in their faces about how stupid they are, they still don't go out and buy any! Weird!
Until next week,
The Mogambo Guru
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- None Found
About the Author
Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.
Comment by bill on 27 June 2007:
mighty mogambo,
gold is not rising in price right
now because people understand what
effect rising interest rates have
on the price of gold as per the early 1980's.
your humble correspondent has a few
receipts to support this opinion.
bill
Comment by Sackerson on 28 June 2007:
From Bearwatch:
"In Monday's The Daily Reckoning, Richard Daughty notes that annually, the US is creating 24 times more new money than the world is producing in new gold at current prices, and he comes to the obvious conclusion: "Planetary Super Bargain".
But there are other ways to do the figures. The same edition of TDR reveals that we already have 150,000 tonnes of gold above ground, so 2,500 new-mined tonnes per year represents 1.67% p.a., compared with the 12% increase in the US M3 money supply. Okay, that looks like a mismatch of supply and potential demand, but this particular ratio is 7.2 times, rather than 24.
Another thought: gold and paper notes are not the only two things in the economy. People have other things to spend their money on, such as their rapidly-growing debts. And if we accept the worst-case future scenario, maybe tins of baked beans and boxes of ammunition will be in even greater demand.
Also, how far has the gold price already factored-in inflation? Using figures from Kitco.com's website, I've compared the average London PM fix in June 2002 with today's New York spot price. Per ounce, gold has gone from $356.53 to $642.50 in 5 years, a rise of around 80% overall. This equates to some 12.5% compound per annum - rather similar to the M3 figure previously quoted. So maybe gold is doing its traditional thing of storing value, more or less, rather than being a sort of asset Cinderella about to hit the big time.
But then again, I could be wrong."