More than 40 Percent of World Wealth Wiped Out By Crunch

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If you are feeling poorer because of the credit crunch, it is for a reason: 40 percent of the world's wealth has been wiped out so far and it is predicted to only get worse.

Speaking at the World Economic Forum in Davos, Switzerland, Steve Schwarzman, chariman of private equity giant Blackstone, said an "almost incomprehensible" amount of cash has been vapourised by the crunch.

Also at the talk, global media mogul Rupert Murdoch had this to say: "The crisis is getting worse. It's going to take drastic action to turn it around, if it can be turned around, quickly. I believe it will take a long time."

Sir Howard Davies, director of the London School of Economics and a former Bank of England policymaker said: "The outlook is pretty grim. Things are not good and business surveys are coming out showing they're getting even worse."

In 2006, the global market for the financial instruments called derivatives more than doubled to US $29 trillion, according to the Bank for International Settlements (BIS). The total amount of over-the-counter contracts whose value is derived from price changes of bonds, currencies, commodities and stocks, or events like interest rates or the weather, rose 39.5 percent to US $415 trillion, the biggest jump since the BIS began compiling the data.

What this means in layman's terms is this: the entire global economy is based on speculated figures. When the confidence and economic instruments underpinning this enormous bubble of wealth disappear, then it quickly falls apart. While it is true the sun still shines and the rain still comes, such an implosion has very serious consequences for all economic decisions. Many people have based their whole concept of wealth on this bubble, and it will take a long time for them to get to grips with a dramatic reduction in the wealth they believe they have. 

The respected Market Oracle blog has an article contemplating the US entering a period of stagnation lasting two decades. It believes the weight of debt is so great, and consumers feeling so burned by what has happened, people will not fall for the government's attempts to make them consume more, and get further into debt. The consequence will be increasing savings and dropping prices. It also postulates that if the government does press ahead with trying to stimulate more consumption and debt (which it does look like it wants to do), then the end result will be an enormous hyperinflationary crisis along the lines of what is happening today in Zimbabwe. Or happened with the Weimar Republic in Germany prior to World War II. 

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Photos from Iceland's credit crunch demonstrations. Website: http://www.flickr.com/photos/15195144@N06/sets/72157613009834677/