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