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

2. Outline 1)The role of financial markets according to the conventional theory 2)Some empirical evidence 3)Financial-Market Interventionism 4)Conclusions

3. THE ROLE OF FINANCIAL MARKETS ACCORDING TO CONVENTIONAL THEORY Financial Markets and the State

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 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

6. SOME EMPIRICAL EVIDENCE Financial Markets and the State

7. German capital market: equity securities Source: Deutsche Bundesbank, Kapitalmarktstatistik, Oct. 2011 [billion euros] Year Domestic issues Stock market capitalisation Investment fund capitalisation Stock shares Investment fund shares Market prices 20069191 2791 027 200710131 4811 047

8. German capital market: net sellers of fixed income securities Source: Deutsche Bundesbank, Kapitalmarktstatistik, Oct. 2011 [billion euros] YearΣDomestic debtorsForeign debtors Total net sales (including issuer’s own stocks) Bank bondsNonfinancial corporate bonds Government bonds Market prices 200624210240852139 200721790422028127

9. Aggregate Spending and Revenues in Germany [billion euros; source: European Commission] GDP Intermediate Production Total Output Compensation of Employees Total Investments CGCFTotal 2006 1 7524102 3272 1704 4971 1493 729 2007 1 7794462 4322 3184 7501 1803 944

10. 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 Nonprofits4 4331 531 Nonfinancial corporations2 4323 965 Financial corporations9 5679 320 Government6301 720 Rest of the world4 4024 859 TOTAL21 46421 395

11. 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 Nonprofits4 4331 5312 902 Nonfinancial corporations2 4323 965-1 533 Financial corporations9 5679 320247 Government6301 720-1 090 Rest of the world4 4024 859-457 TOTAL21 46421 395+69

12. 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 Nonprofits4 4331 5312 90292% Nonfinancial corporations2 4323 965-1 53347% Financial corporations9 5679 3202478% Government6301 720-1 09035% Rest of the world4 4024 859-45715% TOTAL21 46421 395+69

13. 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%

14. 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%

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% 83% Nonfinancial corporations47%60%66% Financial corporations8%1%10% Government35%27%34% Rest of the world15%8%7%

16. 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%

17. 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%

18. FINANCIAL-MARKET INTERVENTIONISM Financial Markets and the State

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. 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)

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. CONCLUSIONS Financial Markets and the State

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

31. FINANCIAL-MARKET INTERVENTIONISM Financial Markets and the State