Financial Markets and the State Academia de Studii Economice Bucuresti, 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 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

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 EVIDENCE Financial Markets and the State

German capital market: equity securities Source: Deutsche Bundesbank, Kapitalmarktstatistik, Oct [billion euros] Year Domestic issues Stock market capitalisation Investment fund capitalisation Stock shares Investment fund shares Market prices

German capital market: net sellers of fixed income securities Source: Deutsche Bundesbank, Kapitalmarktstatistik, Oct [billion euros] YearΣDomestic debtorsForeign debtors Total net sales (including issuer’s own stocks) Bank bondsNonfinancial corporate bonds Government bonds Market prices

Aggregate Spending and Revenues in Germany [billion euros; source: European Commission] GDP Intermediate Production Total Output Compensation of Employees Total Investments CGCFTotal

Net Financial Savers and Net Users of Financial Savings Billions of euros; NB: Asset values do not include land Source: Statistisches Bundesamt Germany (2009) Financial Assets Liabilities & Equity Households and Nonprofits Nonfinancial corporations Financial corporations Government Rest of the world TOTAL

Net Financial Savers and Net Users of Financial Savings Billions of euros; NB: Asset values do not include land Source: Statistisches Bundesamt Germany (2009) Financial Assets Liabilities & Equity Net Position Households and Nonprofits Nonfinancial corporations Financial corporations Government Rest of the world TOTAL

Net Financial Savers and Net Users of Financial Savings Billions 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 % Nonfinancial corporations % Financial corporations % Government % Rest of the world % TOTAL

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 corporations47% Financial corporations8% Government35% Rest of the world15%

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 corporations47%60% Financial corporations8%1% Government35%27% Rest of the world15%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% 83% Nonfinancial corporations47%60%66% Financial corporations8%1%10% Government35%27%34% Rest of the world15%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% 83%93% Nonfinancial corporations47%60%66%58% Financial corporations8%1%10%15% Government35%27%34%26% Rest of the world15%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% 83%93%99% Nonfinancial corporations47%60%66%58%33% Financial corporations8%1%10%15%1% Government35%27%34%26%46% Rest of the world15%8%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 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

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

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 increase Source: kitco.com 2001 – 2012: 70% gold price drop in US intraday trading Source: 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

CONCLUSIONS Financial Markets and the State

Implications of financial-market interventionism Political implications Economic implications Cultural implications

FINANCIAL-MARKET INTERVENTIONISM Financial Markets and the State