Anthony Hilton: Counting the cost of some really big numbers
Saturday 23 June 2012
Robert Jenkins made a short speech to hedge fund managers in Monaco on Wednesday.
He has been a trader, money manager, an industry lobbyist and is now a regulator – specifically a member of the interim Financial Policy Committee of the Bank of England. But I got to know him when I used to help out at seminars he used to teach on finance as an adjunct Professor at the London Business School.
One of his themes highlighted by the eurozone crisis is that financial numbers are now so large people can no longer grasp their significance.
So this is his description – attributed by him in turn to the author Bill Bryson – of just how big one trillion dollars is: "Imagine you are in a bank vault and let's say that you could initial one dollar bill a second and keep every dollar bill that you initialled. How long do you think it would take you to accumulate a trillion dollars? Take a guess: five weeks? Six months?
"Well, if you could work without stopping, you would acquire $1,000 every 17 minutes. After 12 days you would be a millionaire. Thus in 120 days you would reach $10m and after 1,200 days – $100m. After 31.7 years you would be a billionaire. After 1,000 years, give or take, you would be as wealthy as Bill Gates. But not until 31,708.8 years would you reach a trillion – an amount equal to 1/600th of the estimated size of the global derivatives market."
He then made the point that even a small percentage of a big number is a big number, but before you dismiss this as obvious look what it means in the context of the global economy.
"Every 1 per cent rise in US interest rates will eventually add some $150bn to the annual US budget deficit. A 1 per cent shift in global asset preferences generates $600bn of security purchases and $600bn of security sales. And if our risk-management models of the aforementioned £600trn global derivatives book were to be wrong by a mere ½ per cent, it would translate into losses of $300bn."
That is about one fifth of the GDP of the entire world.
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