Smick: Markets Still Scared of Bubbles

David Smick, author of  "The World Is Curved: Hidden Dangers to the Global Economy" and recent Bill Clinton fave takes a look at the economic damage so far and sees more to come.

He says markets aren’t responding to billions in global stimulus simply because of the sheer magnitude of what could still go wrong.

The problem, he writes, is that we’re still at risk from (count ‘em) eight financial bubbles of varying sizes. His rough breakdown looks like this:

A number of analysts talk about eight bubbles ranging from the subprime mortgage loans (again, $1.5 trillion) to emerging market debt ($5 trillion) to outstanding credit card debt ($2.5 trillion) to commodities derivatives ($9 trillion) to commercial real estate ($25 trillion) to foreign exchange derivatives ($56 trillion) to credit default swaps ($58 trillion) and so on.

In a worst-case scenario, he says those bubbles could mean roughly $200 trillion worth of financial exposure. As for the fallout?

Factor in a conservative 10 percent drop in the value, or 10 percent default rate, on this exposure and the world would face a $20 trillion challenge

Here’s the catch (and why the markets remain so nervous). The GDP of the entire world is only $50 trillion. World stock and bond markets are now valued at less than $100 trillion.

Translation: Psychologically speaking, central bank monetary stimulus and government fiscal intervention efforts (in the hundreds of billions of dollars) are no match for the markets fear of a worst-case scenario involving tens of trillions of dollars. The numbers are simply mind boggling.”

For more, check out my September U.S. News interview with Smick here.