and according to the Guardian:
Global recession grows closer as G20 summit fails
following economic news immerses you in the detail, the impact of the Euro crisis, the state of debt in developed countries and the fear that recession will at some point tip into depression.
A state of fear grows, fear of loss, fear of the future, fear for our children.
But wait. slap yourself in the face and read some basics.
The current Global economy generates about $63 trillion [it looks like this 63,000,000,000] or £43 trillion. a year or so ago it was $5 trillion less. The human race is still busily mining, growing, making and buying stuff, in fact we are doing more of it than ever before. There are a couple of minor exceptions: contraction in GDP of a few hundred billion in South Korea and the UK but it reflects a minimal amount of growth over a period of a year rather than the beginnings of some kind of dark-age. A lack of growth in the economy is a rarity because there is a tendency for producers to get better at their job year on year. It makes sense for businesses to economise on energy, to have more able staff and reduce costs.
Much of the so-called recession we see is visible in the financial markets where $billions are lost overnight. What happened to all that money? Did slip down the back of the sofa? Was there some great heist? The money was la-la money, a fantasy and most of it had little to do with GDP, or actually stuff.
The World may have produced $63 trillion worth of goods and services as well as a couple more trillion for illegal activities but this is nothing compared to the La-La land of the derivatives market which last year was around $600 trillion. Derivatives which are ‘market instruments’ deriving from the real economy, such as Futures, has grown from almost nothing 20 years ago and producing nothing have a disproportionate influence on the global debt crisis.
The futures derivatives have been around as long as humans have been trading and serve a sound purpose. An example is the potato farmer who expects 100 tons of crop in 6 months time and is promised a set price by the grocer. If there is a glut of potatoes on the market and the price per ton goes down the farmer doesn’t lose out because the price is set, likewise if there is a shortage the grocer is not forced to pay more. The most widely used [by normal people] Derivative is the Fixed Mortgage rate over a variable one. This sounds reasonable and it is the example that the ‘money market’ wants people to hear. But just as people are very creative at working out ways to fill a casino with novel ways of making money so to the ‘market’ has taken the principle to an extreme.
If potatoes can be bought for a set price in the future so can company shares and government bonds, this is the Options game so roll up and learn the rules to this fab game of risk. A broker can offer shares at an above market value i.e £1.20 rather than the current £1 to a buyer for a small fee of around 6%:6p and they have the option, say two months later, to buy them. This is great for the buyer if the price has risen above £1.26p as they can make a profit, if they don’t sell the seller has made 6p for their trouble. The game also extends to government bonds which are IOU notes with interest paid either at the end or maturity of the bond which can be as little as 3 months or every 6 months if the bonds are longer loans. Bonds can become more or less valuable depending on the interest paid and how much risk, Greek bonds currently make a lot of money with excessive interest demands but buyers get nervous if they think the Greeks won’t eventually pay out, it’s all about selling at the right time. And you can also play this game with currencies buying say, Euros with Dollars and betting on the exchange rate.
In their simple form some of these ‘instruments’ are useful: a smart phone company in the US may wish to launch in the Euro zone with a product at a set price in 6 months time but if the Euro becomes less in worth against the $ 6 months from now the phone price will not cover its costs. The phone company may hedge its bets by taking out an option on Euros and the Euro zone buyers will look to have an option [to buy] Dollars. Where it gets all weird is in the first instance you don’t have to own the shares /bonds / currency/ potatoes etc to sell options on them and the buyer then has to right to sell the option they have agreed which then can be sold on to other speculators and resold and traded. Options and futures can then be bundled up together mixing potatoes with mortgages, oil and Greek debt and traded. Some of these instruments become incredibly elaborate allowing low risk betting to cover more suspect deals. Even more mystical is the use of Leverage where borrowing can increase profit even when the price of the real asset may have increased in value by 10% the profit on the Derivative can be 100%.
When it comes to Derivatives I do not pretend to know anything but the basics but it should be remembered that in this unregulated area of the markets all this money making is based on nothing being produced and in the main benefiting no one beyond the speculators and dealers. What is worse is these traders are looking for a quick buck which means they move their money very quickly sometimes in as little as half an hour. All this movement, especially in currencies can destabilise them leading to drastic interest rate raises and subsequent borrowing problems. The problems become drastic for the people of affected countries and lead to reduced social care and reinvestment.
Free market capitalism is the right to make money but social responsibility must be upheld. The freedom of a few should not be allowed to sabotage the rights of the many. The Nobel price winning economist James Tobin came up with a solution to this inequality back in 1972 when Derivatives were a tiny market and currency speculation was the main problem.
Tobin summarized his idea: “The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied – let’s say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties’ crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets”.
The need now is greater than ever and a new Tobin or Robin Hood Tax is on the cards. Despite G20 countries, the EU and the UN talking about it for over a decade there is a real chance that it could be introduced with the EU wide European Commission’s financial transaction tax (FTT) proposal. Oxfam reckons a tax of 0.05% could raise up to $400bn which it has been proposed could go a long way in helping protect the Third World from the impact of Climate Change.
I will be no surprise that the millionaire Tory government is opposed to the idea: in the Telegraph 8/11/11 “George Osborne has condemned plans for a European Union levy on financial transactions as a “big tax on pensioners” that will lead to 995,000 job losses and not cost bankers a penny.” But the truth is always different.
In January 2008, The Economist reported that Morgan Stanley estimates that pension funds worldwide hold over US$20 trillion in assets, not quite the $600 trillion of the derivatives market; and pension funds are not big players in the derivative markets because the risks are to great. As for the job losses it appears George Osborne feared for the 995,000 jobs in the banking sector across the EU would be lost to the US and other markets.
Oh well better say by by by.
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