Financial Markets and the State

1. Financial Markets and the State Academia de StudiiEconomice Bucuresti, May 15, 2012

2. Outline • The role of financial markets according to the conventional theory • Some empirical evidence • Financial-Market Interventionism • Conclusions

3. Financial Markets and the State The role of financial markets according to conventional theory

4. General Consequences of Financial Markets • Use of present and future resources • Different uses than otherwise (ST and LT) • Improved uses (hopefully) • More resources to be used in the future • Incentive for larger savings • Growth mechanisms • More resources to be used

5. Macroeconomic benefits of financial markets More incentives to save • Pooling of savings • Volume • Risk sharing • Liquidity of savings • Information • Consumption smoothing • Reorganisation of corporations Better use of savings

6. Financial Markets and the State Some Empirical Evidence

7. German capital market: equity securitiesSource: Deutsche Bundesbank, Kapitalmarktstatistik, Oct. 2011 [billion euros]

8. German capital market: net sellers of fixed income securities Source: Deutsche Bundesbank, Kapitalmarktstatistik, Oct. 2011 [billion euros]

9. Aggregate Spending and Revenues in Germany[billion euros; source: European Commission]

10. Net Financial Savers and Net Users of Financial SavingsBillions of euros; NB: Asset values do not include landSource:StatistischesBundesamt

11. Net Financial Savers and Net Users of Financial SavingsBillions of euros; NB: Asset values do not include landSource:StatistischesBundesamt

12. Net Financial Savers and Net Users of Financial SavingsBillions of euros; NB: Asset values do not include landSource:StatistischesBundesamt

13. Net Financial Savers and Net Users of Financial Savings Source:StatistischesBundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;author’s calculations

14. Net Financial Savers and Net Users of Financial Savings Source:StatistischesBundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;author’s calculations

15. Net Financial Savers and Net Users of Financial Savings Source:StatistischesBundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;author’s calculations

16. Net Financial Savers and Net Users of Financial Savings Source:StatistischesBundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;author’s calculations

17. Net Financial Savers and Net Users of Financial Savings Source:StatistischesBundesamt, BOG Federal Reserve, INSEE, ONS, Cabinet Office;author’s calculations

18. Financial Markets and the State Financial-Market interventionism

19. 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

20. 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

21. Financial-Market Interventionism: Inflation (II) Consequences of fiat inflation • Excessive financial intermediation • Excessive demand for government securities • Permanent price-inflation • Discouragement of money hoarding • Excessive investment in real estate • Excessive investment in securities • Excessive demand for government securities

22. Financial-Market Interventionism: Forced Savings Overall savings volume Savings invested in securities • Direct • Mandatory insurance • Indirect • As a consequence of redistributive effects of inflation • As a consequence of taxes, business regulations, and other interventions discouraging one’s own business

23. Financial-Market Interventionism: Forced Lending to the State • Direct • Households and private firms • Social security organisations • Indirect: financial regulation • Investments of intermediaries • Basel agreements

24. 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.

25. 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

26. Price Rigging of Precious Metals (I) 2001 – 2012: 70% gold price drop in US intraday trading Source: chrismartenson.com 2001 – 2012: 590% overall gold price increase Source: kitco.com

27. 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

28. 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

29. Financial Markets and the State Conclusions

30. Implications of financial-market interventionism • Political implications • Economic implications • Cultural implications

31. Financial Markets and the State Financial-Market interventionism