Derivatives Market Has Some Weird Math

2 + 2 = 5? New Math is Scary!

Im a big George Orwell fan. Its probably because Im skeptical by nature. And my skepticism is always peaked when I hear the so-called experts sling around their insights on the financial markets.
I call these insipid talking heads experts of Newspeak. According to Orwell, Newspeak is a new language that allows those in control to assign new meanings to old words.
And the Newspeak crowd seems quite proud of their newly minted term, The New Era of Finance.
To them, debt represents all things good. Forget those old school notions. Debt shall set us free from the bounds of economic gravity! preaches the Newspeak crowd. How else do you explain the following scary set of stats I just read in a report from Morgan Stanley? The report said:
The latest survey shows that the global derivatives market grew at an annual rate of 68.5% to US$297.7 trillion in 2005 and US$415.2 trillion at the end of last year. In other words, the global pool of structured financial products ballooned from 8.7% of global GDP in 1987 to 246.1% in 2000 and then to 789.2% last year.
Its the last line that contains the most staggering statistics, so its worth repeating once again: the global pool of structured financial products ballooned from 8.7% of global GDP in 1987 to789.2% last year [2006].
Wow! Holy debt mountain, Batman! Those numbers are absolutely staggering to me. When I think about some of the ramifications of this massive inflation of derivatives, it makes me want to go back to bed, pull the covers over my head, and stay there until its safe to come out again. Unfortunately, I dont have that luxury.
Scary point #1: Consider the fact that the epic U.S. stock market crash in 1987 came at a time when derivatives represented a relatively small percentage of the global economy. And yet, derivatives, used for portfolio insurance, were a large contributing factor to the crash. So today, we have a market riding on a sea of liquidity thats about 90 times larger than it was back then.

Scary point #2: I cant help but wonder why all financial assets arent a lot higher than they are now. Think about it. What if I told you back in the year 2000, that by the end of 2006, the world would pump three times more money into stocks, bonds, commodities, and private equity funds than are there now? Its possible you would have believed the Dow Jones Industrial Average had a chance of hitting Dow 36,000 -- which was the farcical title of a book published at the time. Instead, the Dow just inched above 13,000 in April.

Scary point #3: Look at the worlds inflation. If inflation is a function of money being pumped into the system, and since 2000 massive more amounts of money have been pumped into the worlds markets in such a relatively short period of time, then logically shouldnt there be a huge inflation in prices of everything in the world?

Scary point #4: At what point do additional levels of debt stop adding to economic activity and start to become a burden that gets the all rolling in the opposite direction? At what point do we reach a massive debt liquidation that steamrolls just about every asset class in its path? In short, are we getting close to some type of saturation point?
Im sure there is no need to worry. The Newspeak crowd has a Newmath division thats already proved debt saturation is obsolete in the New Era of finance.
Freedom is the freedom to say that 2 + 2 = 4, said Orwell in his famous book, 1984 . Its a math lesson I think we need to think about.