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"The Giant Pool of Money"

By Jeff Yates

If you haven't already listened to it yet, I encourage you to check out the episode of This American Life titled "Return To The Giant Pool of Money".  The episode recaps and augments an episode from May of  last year, "The Giant Pool of Money". These episodes offer perhaps the most accessible, concise and informative accounts of the recent financial crises that I have heard or read. Below the fold is a brief excerpt from the transcript of the original episode that can be downloaded free here. This passage discusses how the world's supply of money (aka "The Giant Pool of Money") took several hundred years to reach a total of 36 trillion in the year 2000 and subsequently grew to over 70 trillion just 6 years later (according to the more recent episode it's currently at about 80 trillion). That's a lot of money to invest and that growth led to ... well, listen to the podcast.

Alex Blumberg: To help explain out what happened, here's my partner for this

hour, Adam Davidson, the international business reporter for NPR. Hey Adam.

Adam Davidson: Hey Alex.

Alex Blumberg: So, I guess the first thing we have to talk about is the global pool

of money, right?

Adam Davidson: Right. The global pool of money. That's where our story begins.

Most people don?t think about it but there?s this huge pool of money out there, which

is basically all the money the world is saving now. Insurance companies saving for a

catastrophe, pension funds saving money for retirement, the central bank of England

saving for whatever central banks save for. All the world?s savings.

Ceyla Pazarbasioglu: It's a lot of money. It's about 70 trillion.

Adam Davidson: That is the head of capital market research at the International

Monetary Fund, the place to go if you want know how much money is in the world.

Adam Davidson: How do we pronounce your name?

Ceyla Pazarbasioglu: That will take two minutes at least. It's Pazarbasioglu.

Ceyla Pazarbasioglu. I'm very impressed.

Adam Davidson: And, by the way, before you finance enthusiasts start writing any

letters, we do know that 70 trillion technically refers to that subset of global savings

called fixed-income securities. Everyone else can just ignore what I just said. Let?s

put 70 trillion dollars in perspective. Do this. Think about all the money that people

spend everywhere in the world. Everything you bought in the last year, all of it. Then

add everything Bill Gates bought. And all the rice sold in China and that fleet of

planes Boeing just sold to South Korea. All the money spent and earned in every

country on earth in a year: that is LESS than 70 trillion, less than this global pool of

money.

Alex Blumberg: Wow, that is a lot of money.

Adam Davidson: It is a lot of money. And that money comes with an army of very

nervous men and women watching over the pool of money: investment managers.

This army is nervous because they don't want to lose any of that money and they

also want to make it grow bigger. But to make it grow, they have to find something

to invest in. So, for most of modern history, they bought really, really safe, really

boring investments: things called treasuries and municipal bonds. Boring things. But

then, right before our story starts, something changed, something happened to that

global pool of money.

Ceyla Pazarbasioglu: This number doubled since 2000. In 2000 this was

about 36 trillion dollars.

Adam Davidson: So, it took several hundred years for the world to get to 36

trillion. Then, in six years, to get another 36 trillion.

Ceyla Pazarbasioglu: Yeah. There has been a very sharp increase.

Adam Davidson: How's the world get twice as much money to invest? Lots of

things happened, but the main headline is all sorts of poor countries became kind of

rich making TVs and selling us oil: China, India, Abu Dhabi, Saudi Arabia. Made a lot

of money and banked it. China, for example, has over a trillion dollars in its central

bank, and there are office buildings in Beijing filled with math geniuses-real math

geniuses-looking for a place to invest it. And the world was not ready for all this

money. There's twice as much money looking for investments, but there are not

twice as many good investments. So, that global army of investment managers was

hungrier and twitchier than ever before. They all wanted the same thing: a nice low

risk investment that paid some return.

But then something happened to make matters worse, at this precise moment, one

guy took one of that army's favorite investments and made it a lot less attractive.

Full post as published by The Faculty Lounge on September 29, 2009 (boomark / email).