Financial Markets in the United States

Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds and some government-sponsored enterprises...

Financial Markets Foreign Exchange Markets Insurance, Rental, Leasing, Derivatives Foreign Exchange Markets Credit Markets Money Market Banking Capital Markets Stock Markets Bond Markets

Many people have noted and become concerned that the share of GDP going to finance related output is rising – more recent estimates makes it about 6%.

Friedman laments that too many graduates of Harvard are getting jobs in finance. Why is this a problem?

The US stock market dominates the world – but if we include China A-shares its size grows 10 times. A-shares are not offered to foreigners.

The graph above shows that finance added 1. 3 million jobs The graph above shows that finance added 1.3 million jobs. The Great Recession of 2009 reduced the number of jobs by about 500,000 jobs. Recovery of these jobs has been slow for Wall Street – like Main Street. The jump in employment after 2014 may have been influenced by Obamacare.

The rate of unemployment in the financial industry is quite low ( roughly 2%). Note how that the rate jumped in 2016 but is still quite low. Workers in the financial industry do not appear to be in danger of losing their job. The rate rose to 8% during the Great Recession (or 4 times the usual rate) so from that point of view it may be riskier.

Growth of median weekly earnings in finance was quite stable Growth of median weekly earnings in finance was quite stable. Average nominal growth was roughly 4% per year over the period 2000 – 2015. Real growth of earnings is about 2.5% and thus roughly in line with real GDP growth.

Arbitrage Relation between Stocks and Bonds

Fundamentals of Stock Prices

Note here that from 1980 to 1994 the stock market (measured by the Wilshire US Micro-Cap) tracked the nominal GDP well. This means that on average the twpo series are growing at the same rate and there are no bubbles.

What looks like bubbles can be seen after 1994. Why is this?

Problems with Monetary Policy Equation of Exchange MV = PY

correlation = 0.35 Growth of velocity and growth of the personal saving rate are relatively highly correlated in a positive fashion during this period....

correlation = -0.42 However, the correlation structure changes to negative in this period and it is large in absolute value. This says that as as people attempt to save more, velocity adjusts downward. Note however, that the interest rate cannot fall during this period.

Why is velocity falling even though the long term nominal rate of interest is flat or rising throughout the period? Something else must be pushing down the velocity here. Could it be a wealth effect in the demand for money. Something must be increasing the amount of money people want to hold, given their real income. Remember that a falling velocity puts extreme downward pressure on prices and output.

Why is velocity falling even though the short term nominal rate of interest is virtually flat throughout the period? Something else must be pushing down the velocity here. Could it be a wealth effect in the demand for money. Note that using the internet and your phone to buy things should be RAISING the velocity of money.