Financial Markets and the State Academia de Studii Economice Bucuresti, May 15, 2012
Jan 18, 2016
Financial Markets and the State
Academia de Studii EconomiceBucuresti, May 15, 2012
Outline
1) The role of financial markets according to the conventional theory
2) Some empirical evidence
3) Financial-Market Interventionism
4) Conclusions
THE ROLE OF FINANCIAL MARKETS ACCORDING TO CONVENTIONAL THEORY
Financial Markets and the State
General Consequences of Financial Markets
• Use of present and future resourcesDifferent uses than otherwise (ST and LT)Improved uses (hopefully)
More resources to be used in the future
• Incentive for larger savingsGrowth mechanisms
More resources to be used
Macroeconomic benefits of financial markets
1. Pooling of savings Volume Risk sharing
2. Liquidity of savings
3. Information
4. Consumption smoothing
5. Reorganisation of corporations
More incentives
to save
Better use of savings
SOME EMPIRICAL EVIDENCEFinancial Markets and the State
German capital market: equity securitiesSource: Deutsche Bundesbank, Kapitalmarktstatistik, Oct. 2011 [billion euros]
Year
Domestic issuesStock market capitalisation
Investment fund capitalisationStock shares Investment fund
sharesMarket prices
2006 9 19 1 279 1 027
2007 10 13 1 481 1 047
German capital market: net sellers of fixed income securities Source: Deutsche Bundesbank, Kapitalmarktstatistik, Oct. 2011 [billion euros]
Year Σ Domestic debtors Foreign debtorsTotal net sales
(including issuer’s own
stocks)
Bank bonds Nonfinancial corporate
bonds
Government bonds
Market prices
2006 242 102 40 8 52 139
2007 217 90 42 20 28 127
Aggregate Spending and Revenues in Germany[billion euros; source: European Commission]
GDPIntermedi
ate Productio
n
Total Output
Compensation
of Employee
s
Total Investme
ntsC GCF Total
2006 1 752 410 2 327 2 170 4 497 1 149 3 729
2007 1 779 446 2 432 2 318 4 750 1 180 3 944
Net Financial Savers and Net Users of Financial SavingsBillions of euros; NB: Asset values do not include land
Source: Statistisches Bundesamt
Germany (2009) Financial Assets
Liabilities& Equity
Households and Nonprofits 4 433 1 531Nonfinancial corporations 2 432 3 965
Financial corporations 9 567 9 320
Government 630 1 720
Rest of the world 4 402 4 859
TOTAL 21 464 21 395
Net Financial Savers and Net Users of Financial SavingsBillions of euros; NB: Asset values do not include land
Source: Statistisches Bundesamt
Germany (2009) Financial Assets
Liabilities& Equity
Net Position
Households and Nonprofits 4 433 1 531 2 902Nonfinancial corporations 2 432 3 965 -1 533
Financial corporations 9 567 9 320 247
Government 630 1 720 -1 090
Rest of the world 4 402 4 859 -457
TOTAL 21 464 21 395 +69
Net Financial Savers and Net Users of Financial SavingsBillions of euros; NB: Asset values do not include land
Source: Statistisches Bundesamt
Germany (2009) Financial Assets
Liabilities& Equity
Net Position
Percentage of total net fin. savings
Households and Nonprofits 4 433 1 531 2 902 92%Nonfinancial corporations 2 432 3 965 -1 533 47%
Financial corporations 9 567 9 320 247 8%
Government 630 1 720 -1 090 35%
Rest of the world 4 402 4 859 -457 15%
TOTAL 21 464 21 395 +69
Net Financial Savers and Net Users of Financial Savings Source: Statistisches Bundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;
author’s calculations
Germany (2009)
USA(2010)
France(2010)
UK(2010)
Japan(2010)
Households and Nonprofits 92%
Nonfinancial corporations 47%
Financial corporations 8%
Government 35%
Rest of the world 15%
Net Financial Savers and Net Users of Financial Savings Source: Statistisches Bundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;
author’s calculations
Germany (2009)
USA(2010)
France(2010)
UK(2010)
Japan(2010)
Households and Nonprofits 92% 92%
Nonfinancial corporations 47% 60%
Financial corporations 8% 1%
Government 35% 27%
Rest of the world 15% 8%
Net Financial Savers and Net Users of Financial Savings Source: Statistisches Bundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;
author’s calculations
Germany (2009)
USA(2010)
France(2010)
UK(2010)
Japan(2010)
Households and Nonprofits 92% 92% 83%
Nonfinancial corporations 47% 60% 66%
Financial corporations 8% 1% 10%
Government 35% 27% 34%
Rest of the world 15% 8% 7%
Net Financial Savers and Net Users of Financial Savings Source: Statistisches Bundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;
author’s calculations
Germany (2009)
USA(2010)
France(2010)
UK(2010)
Japan(2010)
Households and Nonprofits 92% 92% 83% 93%
Nonfinancial corporations 47% 60% 66% 58%
Financial corporations 8% 1% 10% 15%
Government 35% 27% 34% 26%
Rest of the world 15% 8% 7% 7%
Net Financial Savers and Net Users of Financial Savings Source: Statistisches Bundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;
author’s calculations
Germany (2009)
USA(2010)
France(2010)
UK(2010)
Japan(2010)
Households and Nonprofits 92% 92% 83% 93% 99%
Nonfinancial corporations 47% 60% 66% 58% 33%
Financial corporations 8% 1% 10% 15% 1%
Government 35% 27% 34% 26% 46%
Rest of the world 15% 8% 7% 7% 21%
FINANCIAL-MARKET INTERVENTIONISM
Financial Markets and the State
Financial-Market Interventionism
• An interventionist government commands private property owners to use their resources in a different way than these owners themselves would have used them (Mises 1929, chap. 1).
• Financial-market interventionism aims at improving the government’s bargaining position vis-à-vis its creditors.
• Instruments:– Inflation– Forced savings– Forced lending to the state– Price rigging
Financial-Market Interventionism: Inflation (I)
Def. “inflation”Cantillon Effects
• Promoting fractional-reserve banking
• Intervention spiral– Central banks– Fiat money– Stabilising financial markets
• “Plunge protection team” (President’s “Working Group on Financial Markets”)
• Sovereign and CB purchases• Fictitious business accounting
Financial-Market Interventionism: Inflation (II)
Consequences of fiat inflation
• Excessive financial intermediationExcessive demand for government securities
• Permanent price-inflationDiscouragement of money hoarding
Excessive investment in real estateExcessive investment in securities
Excessive demand for government securities
Financial-Market Interventionism: Forced Savings
Overall savings volumeSavings invested in securities
• DirectMandatory insurance
• IndirectAs a consequence of redistributive effects of
inflationAs a consequence of taxes, business regulations,
and other interventions discouraging one’s own business
Financial-Market Interventionism: Forced Lending to the State
• Direct– Households and private firms– Social security organisations
• Indirect: financial regulation– Investments of intermediaries– Basel agreements
Financial-Market Interventionism: Price Rigging
Background: interest rates on the public debt
• Financial derivate trading
• Forex interventions
• Controlling the inflation rate
• Precious metals
• Other: threats of seizures etc.
Controlling the Inflation Rate
– Oil prices• Strategic Oil Reserve• Oil financial derivative trading
– Changing the computation of the inflation rate• Changing price weightings• Hedonistic pricing• Real estate: quasi-rents
– Misreporting / lies
2001 – 2012:590% overall gold price increaseSource: kitco.com
2001 – 2012:70% gold price drop in US intraday tradingSource: chrismartenson.com
Price Rigging of Precious Metals (I)
Price Rigging of Precious Metals (II)
• Gold and interest rates↔ Bull stock market not a problem
• Using public stockpiles of precious metals– London Gold Pool– Gold swap arrangements between CBs
• Corrupting intermediaries– Authorising recalcitrant redemptions– Derivatives markets: very large naked shorts– Derivatives markets: very strong concentration
Financial-Market Interventionism: Other Forms of Price Rigging
• Strategic Oil Reserve
• Threat of Seizures (of financial and other assets)– Trading with the Enemy Act– Emergency Economic Powers Act
• Seizures– “Monetary reform”– Precious metals
CONCLUSIONSFinancial Markets and the State
Implications of financial-market interventionism
• Political implications
• Economic implications
• Cultural implications
FINANCIAL-MARKET INTERVENTIONISM
Financial Markets and the State