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For a Civic and Constitutional Republic 


Issue No 75 Monday 8 August 2011

This Week

  • The Markets. The Markets. Who Are These “Markets” We Are So Beholden To?

  • When Revulsion Gets Too Strong to Bear

News Stories

Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.


  • The Markets. The Markets. Who Are These “Markets” We Are So Beholden To?

Peter Kellow writes

As the great crisis goes into its second phase, we have heard an awful lot about “the markets” and, rest assured, we are going to hear a lot more. There are quite a few main players in the crisis: from governments to banks, from political leaders to economists. But the reporting of it tell us that “the markets” are also one (or several) of them. But who or what are they?

In a piece in the Observer this Sunday, the economist, Will Hutton, refers to “the markets over a dozen times saying:

“The markets have issued a stark warning.”
“The markets lurched downward ...”
“To panicking markets, it looked what it was ...”
“The markets have lost confidence”
“The markets have known these truths for some months“
“What has unnerved the financial markets …“
“The markets' reaction is made worse .“
“The markets need the prospect of sustainable growth“
“The markets' judgments are brutal“

It is strange that reporters never actually tell us who, or what, these “markets” are. It is perhaps assumed that we know already, but it feels more is if the word “markets” refers to some indefinable, ineffable force to which we know we must just bow down. We don’t need to question what they are and should not do so. We certainly should never put their authority in doubt, or terrible things might happen.

But in spite if their remoteness, the “markets”, from comments like those of Hutton, start to assume something of a personality. This personality resembles more than anything that of the great Greek god of the Olympiad, Zeus: sometimes almightily powerful, sometimes tetchy, sometimes offended, judgmental, pathetic or vulnerable and of course sometimes just plain brutal. But, as for Zeus, we just have to accept and pay homage and try our best not to offend.

The use of the word “markets” is a way of referring to something we are not expected to understand or approach. But the real reason why the “markets” must remain cloaked in mystery is that the truth exposes a sickness that is intrinsic to the whole political/economic model we work under.

It is a curious fact that reporting of the crisis focuses entirely on debt. There is private debt, public debt, debt everywhere you look. But is it hardly sophisticated economic theory to point out that where there is a debtor there is also a creditor. The closest we ever get to defining the creditors is by reference to these invisible “markets”.

Also an unstated, but really quite remarkable fact, is that, however big government debt may be, there is always someone or something out there that can buy this debt. That is not to say they always necessarily will, but in practice they do. It is just a question of the price.

The debtors' debts climb into the multiple trillions of dollars or euros and yet the money to finance this debt is always somehow there. Sometimes it might be other governments with surpluses that step in to offer credit (such as China) or from investments like pension funds but a good deal comes from private sources, i.e. private banks. Even when the source is nominally from individuals, as in the case of hedge funds, in reality only a small percentage is of the individuals' money which piggy-backs on “leveraged” finance provided by banks.

So the next question is: where do the banks get the money? How is it always there available? On the face of it, it is a remarkable fact that private banks have enough wealth to support countries in their borrowing, that is, private companies can have country-size balance sheets. It is, indeed, remarkable. But also very disturbing that they should have such power.

What is even more worrying is the way in which this money comes into existence. Investment analysts, David Roche and Bob McKee, wrote an important book called New Monetarism in which they explain how the current financial system has created a monster amount of money off the back of the so-called “derivatives”. They explain that money created in this way dwarfs into insignificance money created by orthodox methods long used by banks and governments.

Derivatives are essentially bets on the movements of any number of economic indicators and contracts: currencies, loans, shares and of course derivatives themselves. How do bets create money?

Look at a simple example. You place a bet on a horse putting down ten pounds. This next day your horse’s form looks better and so you are now in a position where you can sell the bet you placed for more than ten pounds. The point is that you have created, by virtue of your bet, a tradable item. Nothing has happened in the real world. The race will take place regardless of your “economic” activity. You have created a “capital” item where none existed before.

In the world of finance this is exactly what happens when a bank creates a derivative, except the banks can then do something you cannot do. They can use this “capital” as a monetary base for the creation of more money - ten and more times over. But there is yet another reason why derivatives are such a powerful way to create money. This is because they can be applied many times over to the same item in the real economy. It is the same with the horse you bet on. There is no limit to the number of bets a horse can carry.

One of the reasons why the Eurozone crisis is so dangerous is that the derivative contracts on European currencies are worth about 100 times the debts these countries have, simply because of multiple bets on the same thing. So derivatives will magnify the crisis to that amount. And who is holding those derivatives? Banks of course, with their balance sheets bloated by QE money. (Yes that is where a lot of it went.) Do they feel comfortable with all these bets? No problem, the 2008 crisis taught them that the government, i.e. the people, will always come to their rescue.

Crazy? It is the financial world we live in. And this is what lies behind that innocent sounding, neutral word: “markets”. The money they have is a result of money created by gambling on economies and countries, and the means they have at their disposal for multiplying it.

And there is yet another killer blow. Doesn’t gambling at least attract tax revenue for hard up governments? After all, you paid a hefty tax on that horse you bet on. Can it be tax free gambling? Well, of course. They’re banks!

Recommended article of the week


  • When Revulsion Gets Too Strong to Bear

The Guardian writes 'Britain is being run by a "feral" elite whose members are responsible for a series of crises – from phone hacking to the row over bankers' bonuses – which have scarred the country, a new, non-party group headed by the author Philip Pullman claims.'

Read Article

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