Ever wondered how much money there is in the world?

The answer is that nobody really knows for sure, but there are various estimates that involve esoteric calculations.

The thing is though – the total amount of money in the world changes relatively slowly (i.e. it is somewhat inelastic).

New inventions and companies add a bit to the mix.

Major stock market crashes remove some value on the other hand – but less than you might expect. What actually tends to happen when a particular market crashes is that money moves out of that market and into another one. Its somewhat like one of those animal shaped balloons – you squeeze on one part, and the air goes into a different part. This is what has been driving speculation in commodities over the past few years; money moved out of markets like mortgage backed paper, bonds and stocks, and into commodities like oil and gold, because investors don’t want to just sit on cash – they want (or in many cases need – i.e. a fund that invests other people’s money) to make a return on their capital.

Major fortunes have been made by people who are good at working out ahead of time where the money is going to go next. Soros made huge sums of money in currency exchange (most famously betting against the Pound, but also in Thailand and other places), because he figured out where the money was going to go ahead of time.

Here’s the thing: its looking like the commodity rally is slowing down. Maybe. Its hard to call that sort of thing. Certainly various governments are under political pressure to make it uncomfortable to speculate in certain key commodities (i.e. oil), and the Chicago market has been tightening the margins required to buy and sell paper (probably under pressure from the US government), which may tamp down that market a bit.

So where is the money going to go next? I don’t think its into bonds, unless I’m completely off base – the inflation/lending rate thing is too hard to call yet. The stock market seems to be topping out for now, although it may resume growth soon. Nobody wants to touch real estate right now – again too much uncertainty. So is the money going to head overseas? Will investors be willing to go all cash and sit on the sidelines for a bit? My guess is that we’ll see some M&A activity that will be driven by low stock prices, combined by impatient investors with a lot of cash. I also wouldn’t be surprised if we see a lot of instability in currency markets as well, as a result of speculators pushed out of other markets. Again, its a murky situation and nobody really knows for sure.

The point of the vague meandering above is as follows though: I have some ideas regarding how a computer could track global flows of money over time and try to figure out the possibilities of different kinds of outcomes. Something like a “Soros in a Box”, if you will. Not completely original – I know that there’s any number of hedge funds that have proprietary systems like this.  I’d be interested in bouncing ideas off of people smarter than myself though…