An alien race visits planet Earth and they like it so much they want to buy it. “How much is it worth?” they enquire. Hard one to answer. The data that is most available is the gross world product; the global equivalent of GDP. But this tells us the level of economic or monetary activity rather than the value of all the land. GWP in 2008 was about $70 trillion. When one looks at the level of debt and costs of bailouts throughout the world this number seems frighteningly small. Let's make some kind of estimate based on a price/earnings ration. Much of the highest priced land in the world is in metropolitan areas and it tends unless rented to not be earning anything. Let's pick a high but not ridiculous PE ratio of 40, making the Earth worth about $2,800 trillion. However, the current estimate of the size of the financial derivatives market is about $1,400 trillion. Half the world! This figure may even be an underestimate as it combines the regulated exchange traded derivatives (ETDs) and the largely unregulated over the counter markets (OTCs).
But our aliens are a shrewd bunch and they argue that this is hugely inflated; poor stitching, cheap lining, a bit tight round the shoulders - you get the picture. They argue that much of this monetary value is fictitious being brought about by money borrowed on credit being then speculated with in highly leveraged financial products. Any small losses in the underlying assets have become magnified to the point that many businesses have negative real values. Many banks are now worthless. Remember the warning that every derivatives broker gives that you may lose more money than you put in? The problem has become an epidemic and everyone seems to be staring down a black hole. The aliens look smug and say they can wait for the fire-sale.
In the meantime they do a further bit of terrestrial due diligence. George Soros was not in the best of moods. He sees no end in sight for this financial crisis. With reference to the collapse of Lehman Brothers,"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner on Friday. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom." The aliens didn't look particularly out of place in a crowd of students, but did wonder why humans had switched off their telepathic abilities. The old man seemed to be in the midst of his own great depression. "How did you people make such a mess of things?" the aliens enquired. "Ask him." replied Soros, barely looking up but pointing in the vague direction of Paul Volcker.
Volcker had been the Fed chairman in the 1980's and had gained great respect for taming inflation. He was now back as an adviser to President Obama. He said things were going to get worse. "I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world." What happened? Financial innovation is what happened. Borrowing and lending makes a nice tidy low-risk income but that was seen as too boring. When everything is measured by growth rates the financial sector wanted to grow faster – hi-tech finance for a hi-tech world. Except that financial hi-tech came with hi-risk. "These risky securities brought no benefits whatsoever to the public," Volcker lamented, "the invention of the ATM was of far more economic benefit than any asset-backed bond." The two men gulped down their brandies and Soros set to replenishing their goblets. The aliens nodded in agreement, taking cue from the pall that had enveloped the two sages.
On their way back to the mother ship one of the aliens spoke up,"We learnt all of this in ancient history. We could buy this whole place for nothing." They all knew what was coming next. "Let's offer them a new currency. Wipe out their debt and have our own central bank run the world. We could call it the Alien Dollar!" "Perhaps Astral Dollar sounds less threatening, don't you think?" interjected their leader. "They're bright but not particularly perceptive socially, maybe they'll swallow our ADs."
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