We shouldn't be driven by speculators

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The market for government bonds works in what looks to most of us a very strange way. Despite the newspaper headlines about rising interest rates, the interest rate is actually fixed for the whole term of the bond. What appears to make the interest rate change is that the bonds can be traded, and the price at which they are traded doesn’t necessarily bear any relationship to the amount which the government accepted into savings when it issued the bond or the amount which it is obliged to return to the saver when the bond matures. So a £100 bond issued at 3% for 30 years will cost the government £3 a year in interest, and the government will refund £100 at the end of the term. In the meantime, that bond may have been bought and sold many times at varying prices: for anyone buying at less than £100, the interest rate will look higher than 3% and for anyone buying at more than £100, it will look lower than 3%. But, to the government, it is always £3 per year. For any new bonds, the government might need to match the apparent interest rate being paid on existing bonds, but changes in the bond market price do not and cannot affect the cost of existing commitments.

It means that headlines about rises in the rate of interest increasing the cost of ‘borrowing’ and putting huge additional pressure on the government can be misleading. They only increase the cost of ‘borrowing’ on any new bonds issued, not on all bonds currently in existence, although one wouldn’t necessarily understand that from the headlines. There are a number of factors which have pushed the rate for new bonds upwards, not all of which are in the control of the Chancellor. Many of them are part of global rather than local trends. The extent of the impact of the required higher rates depends on whether, and to what extent, the government is obliged to issue new bonds to cover its spending. The Chancellor and government choose to believe that they have no choice in the matter, a conclusion which pushes them inevitably in the direction of austerity and/or tax rises, which just happens to suit their own ideological view. It isn’t the only view, though. As Professor Richard Murphy points out, the government could simply stop issuing bonds and wait for the price to fall, as it inevitably will.

Murphy isn’t alone in challenging the tyranny of the bond markets. There was a letter from another professor in Wednesday’s Guardian addressing the question of bond markets very succinctly. To quote Professor Kushner, bond traders “…strive to reduce long-term stability to short-term volatility in order to multiply transactional opportunities”; in other words the price (and therefore the headline interest rate) is very largely being driven by gamblers and speculators out to make a quick buck rather than by investors making long term decisions. A half-decent Chancellor would seek to isolate us from, rather than fall into line with, the interests of such casino capitalism. It really is time to challenge and smash the hold which these people have on economic policy rather than allow them to cripple the ‘real’ economy in which most of us live in order to satisfy their greed and selfish interests.

Trickle-up economics always wins

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There was a story in the i paper yesterday about how some of the UK’s billionaires ‘lost’ huge amounts of money in a single day as a result of the Trump-induced stock market crash. My heart bleeds for them, of course, although I’ve been unable to find a small enough violin to mark the occasion with sad music. The question, though, is ‘where did the money go?’. After all, basic book-keeping tells us that a loss in one place must be balanced by a gain somewhere else: if the money has ‘gone’ it must have ‘gone’ somewhere.

The truth, of course, is that the money hasn’t gone anywhere; it was never there in the first place. At the time of writing the story, those billionaires still own all the assets they owned the previous day – all that changed was the theoretical cash value of those assets if they decided to sell them at a particular point in time. Even if they did suddenly decide to sell them, they won’t have ‘lost’ the difference between one day’s valuation and the next day’s valuation. The amount that they will have ‘lost’ will be the difference between what they paid for the assets and what they receive from them at the point of sale, adjusted for inflation. In most cases, that ‘loss’ will be negative, i.e. they will have made a profit not a loss. It’s just that the profit will be less than the profit that they would have made had they sold them a day earlier. An asset whose price is inherently volatile and bears little relationship to the underlying value of the property concerned is a remarkably poor way of measuring wealth, and the idea that company owners and long-term investors make a profit or loss on a day-by-day basis as the price of shares varies is nonsense.

That’s not to say that there are no winners or losers, however. People who own shares more indirectly – for example in pension funds – and reach a point where they have little option but to sell will certainly find that, even if they’ve still made a net profit over the whole term of their investment, their retirement plans may have to change dramatically as a result of the actions of the madman in the White House, because they will receive less than they were expecting. It is they, rather than the billionaires, who are the real losers. There are people who have profited as well. People who have, or can access, sufficient funds to buy and sell shares on a daily or even hourly basis can take advantage of all those forced to cash in their savings at a low price by buying low and selling when the stock bounces up again. It’s even easier if they have advance warning of Trump’s actions, a hint of which he was kind enough to give them just a few hours before reversing his tariff decision.

The White House itself has released a video apparently showing Trump congratulating some of his billionaire buddies for making a killing on the back of his actions. “He made $2.5 billion today, and he made $900 million. That’s not bad,” said His Orangeness. There were some real winners and some real losers as a result of Trump’s actions, but they weren’t the billionaires highlighted in the story referred to at the outset. The winners were the people in a position to speculate and gamble on the stock markets, and the losers were those who depended on stability and certainty for their retirement. Surprise, surprise, the net result was that money and wealth flowed from the many into the hands of the few. Trickle-up economics always wins through in the end.

How real is paper wealth?

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‘The markets’ have reacted fairly predictably to Trump’s puerile attempt at a conjuring trick by registering some dramatic drops. The analysts tell us that this reflects their pessimism about inflation, interest rates, and economic growth, all of which are likely to be adversely affected by the trade war which Trump has kicked off. Whilst I don’t doubt that economists (most of them, anyway – there are always some who’ll take a different view) do indeed see Trump’s actions as a threat to economic prosperity, I wonder if that’s what ‘the markets’ are really reacting to. It probably would be the case if markets were doing what classical economics says that they do, which is matching capital with investment opportunities in expectation of future profits. But if those same markets are actually more about gambling and speculation, which is probably the reality behind most trading, then what really drives them is an attempt to second guess what other players will do in response to tariffs in the hope of turning a profit by making a better guess than those other players.

It underlines that share prices an extremely poor indicator of economic value; they often bear little relation to the value of the underlying economic assets which they nominally represent. And their volatility makes them a poor measure of the wealth of their owners. To take just one simple but current example, the share price of Tesla has plummeted since Musk got involved with Trump’s administration. He’s still a very wealthy man, on paper, but his total wealth is apparently a lot less now than it was a few months ago. In his case, the scale of things means that it makes little practical difference, but the question is whether ‘paper wealth’ is a sound basis for assessing anything.

That’s relevant in the context of the increasingly strident calls for a wealth tax here in the UK. Whilst the idea appeals to many of us, assessing the amount of wealth owned by an individual is not a simple or straightforward task, especially if the value of a significant component of that wealth can vary from day to day – or even hour to hour. And non-paper wealth – property, land etc. – is not easily realisable or assessable without being realised. What is easier to assess, albeit still difficult when the tax system is complicated and people can afford to pay expensive advisers (although both of those obstacles could be overcome by a government intent on fairness), is the income generated by that wealth including, of course, any increase in value from the date of acquisition to the date of disposal of any asset. We certainly should do more to tax the wealthy, but taxing the wealthy isn’t necessarily the same thing as taxing their wealth. Their income is a lot easier to get at.

Following the money

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Trump’s attitude to the stock markets varies. When the US stock markets are riding high, Trump is quick to claim it as a vindication of his brilliant economic policies. When they take a dive (as they have done a few times recently, usually in response to wildly fluctuating tariff policies), he claims that he doesn’t pay any attention to what the markets are doing. If his chosen indicator doesn’t show the result he wants, then (like Groucho Marx with principles) he has others.

Whether a stock market movement in a particular direction is a good thing or a bad thing depends on one’s perspective, but it really isn't a very good measure of economic success. For those whose wealth is measured largely in terms of the value of shareholdings – such as, to pick names almost entirely at random, Elon Musk or Donald Trump – a fall in share prices can suddenly make you look a lot poorer, whilst a rise can make you look a lot richer. So: from that perspective, rising share prices good, falling share prices bad. On the other hand, for a wealthy person who wants to acquire more wealth, falling share prices creates good opportunities to buy up assets cheaply, especially if you know, or have reason to believe, that any fall (such as that induced by an on-off tariff policy sending prices yo-yoing) will be followed by a rise. And that’s true, even if there is no insider trading happening.

It underlines one of the issues with a casino-style stock market. Traditional economic theory suggests that the stock market is a means of matching available capital with investment opportunities, but it’s long since become divorced from that (which is why the government’s floated suggestions of replacing cash ISAs with stocks and shares ISAs do not achieve the aim of getting people to invest in businesses). In a casino stock market, share prices no longer bear any clear relationship to the value of the underlying assets. For some investors, there is at least a partial relationship with expected future profit flows in the form of dividends, but day to day share prices depend mostly on expectations of the way those prices will move, with the gamblers and speculators more interested in making money from large and frequent trades on small marginal changes in share price than in the future prospects or dividends of the company whose shares are being traded.

The result is that there are a small number of people making a great deal of money out of Trump’s capriciousness. By what I’m sure is nothing more than complete coincidence, many of them will be among Trump’s donors and supporters. Who’d have thought it?

Vigilantes and gamblers

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The Guardian carried a story the day before the budget, wondering whether ‘bond vigilantes’ would punish Rachel Reeves with a Truss-style market meltdown. Curious word, vigilante, with at least three different connotations that I can think of. The first – showing my age – takes me back to watching Mr Pastry on the TV as a child on a Saturday afternoon. There was one episode where, misunderstanding everything as usual, he wanted to become a village aunty. It has a warm, cosy feel to it – the idea that kindly people are looking out for others. A more dystopian version is where gangs of vigilantes roam the streets imposing their own version of the law, by force if necessary, meting out punishment to those who refuse to comply with their rules. Somewhere in between the two lies the concept of people acting together to assist the enforcement agencies in upholding the law.

The ’bond vigilantes’ referred to by the Guardian don’t fit any of those categories. These are people who are looking to turn a penny by trading bonds, in massive quantities, with the intention of leveraging the odd few pennies here and there – multiplied, of course, by the millions of bonds involved. They are more akin to gamblers and speculators than law enforcement officers. They claim to be using their judgement on financial events, such as the budget, to guess as to whether rates of return will go up or down as a result. In truth, they aren’t really even doing that – they’re actually guessing about whether other traders will guess that rates will go up or down and placing their bets accordingly.

Bond market speculation isn’t like betting on the geegees though. When it comes to horses, the number and size of bets placed may affect the odds that the bookies will give you, but they don’t make the horses run any faster. In the financial markets, the bets placed directly affect the outcome as well. If enough people buy and sell bonds in a way which anticipates a rise in the rate of return, then the rate of return will rise, and vice versa. The sad part is that the neoliberal governments, of whichever party, with which we have been saddled for decades believe that things have to be this way, and they have no choice but to follow the dictats of the markets. Their power is constrained mostly by their own lack of imagination.

Giving with one hand and giving with the other

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The theoretical basis for reducing taxes on the highest paid is that they will invest the money saved in ways which boost economic growth. It’s a sweeping assumption. There is no doubt that ‘some’ of the money will be invested like that, but no-one knows how much, and it isn’t the only option. Some will simply be spent, which is another way in which the economy might be boosted a bit. But some will be saved, and no doubt a significant amount will find its way into secretive offshore tax havens. One of the big unknowns at the heart of the gamble is how the money ends up being split between those four options. That in turn depends on the calculations that those in receipt of the unexpected windfall make before deciding what is in their own best interests. And one of the factors in those calculations will be expectations about the future, which make it unlikely that much of the money will end up being used as the government might wish.

Investing in new businesses and innovation is a long term decision, so one obvious question is whether those making the decisions really believe that this is a good time to be taking long term decisions. With a government which looks as though it might, just about, limp through to an election in two years time, but which has an obvious potential for collapse a lot sooner than that if things go horribly wrong; with a major war raging in Europe, whose progress and outcome, to say nothing of its effect on energy availability and prices, remains highly unpredictable; and a pandemic which is far from being over with the potential for large new waves, many are likely to conclude that ‘certainty’ is a little lacking at present. Major investments look to be riskier than they have been in the past, and the rate of return on savings may be a better bet for many.

We know that interest rates on both borrowing and saving are likely to be rising, a trend which the not-a-budget-at-all will only accelerate, whilst the volatility of the pound adds to uncertainty. All that also has a negative impact on a willingness to take investment risk, and provides a positive incentive to find a safe haven for cash, whether overseas or in the UK itself. And one of the safest havens of all in the UK is government bonds, the interest rate on which rose sharply in the aftermath of the ‘fiscal event’. There is a common belief that when the UK government borrows money, it borrows it from other countries or overseas investors; but in reality, most borrowing is on the domestic market. Most is, effectively, borrowed from UK citizens; sometimes directly, but more often through financial institutions, such as pension funds, investment funds, banks and insurance companies. In a sense, therefore, most of us (through our pension funds etc.) are actually lending money to the government, even if we don’t realise it. This is, on the whole, something which benefits most of us. It’s worth noting, though, that the wealthier people are, the more money they are likely to have in their pension pots (as well as insurance, investment funds, banks etc.), and the more, therefore, that they lend the government. The interest on those loans, however, is paid by all taxpayers, even those who have loaned precisely nothing, either directly or indirectly, to the government. It’s one of the hidden ways in which wealth is transferred from those who have little to those who already have a lot, and that transfer is far more significant than the intergenerational transfer as which it’s sometimes inaccurately painted (the nonsense about future generations paying for today’s borrowing), because future generations, collectively, will inherit not only the liability but also the asset. The issue is that the people inheriting the asset aren’t the same ones who inherit the liability; it’s an inequality issue, not a generational one.

There is another effect here. Those traders who have been betting so substantially against the pound in expectation that the budget would lead to a crash have not only made small fortunes for their banks, they have also made it certain that interest rates will go up – maybe this week, and possibly even as soon as today. The traders can now receive bumper bonuses for their efforts, pay less tax than they previously would have done, lend the difference to the government, and be paid for the privilege at the higher rates of interest which they themselves have done so much to bring about. Verily, this is a government which giveth with one hand and then giveth a bit more, just to be certain, with the other. To the select few.

Following the money

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When I read in the Sunday Times that the Brexit campaign was largely funded by the wealthiest people in the UK but that the fifth largest financial backer of the Brexit campaign was a hedge fund manager whose fund had lost half its value during 2016 following Brexit, my first reaction was that there is such a thing as karma after all.  But then I looked at the detail…

According to the story, one of the reasons that the fund lost half its value was that it took excessively gloomy positions about the immediate impact of Brexit on the UK economy.  This story from the Independent provides more details of the way in which the fund concerned bet on Brexit being a bad thing for the UK economy.  The hedge fund manager predicted that UK stocks would lose up to 80 per cent of their value amid a recession and higher inflation following Brexit, and bet heavily on that outcome. 

Had he been right in his prediction, he would have made a lot of money for his fund as the UK economy tanked.  Unfortunately for him (although, perhaps, fortunately for the rest of us), the Brexit vote itself did not have as serious an effect as he predicted (although whether actual Brexit, if or when it happens, will let us off so lightly has yet to be seen), and the result was that the fund gained heavily in the first few days when it appeared that the predictions might be right, but then went on to lose a great deal of money.

So, to summarise, a billionaire who believed that Brexit would be extremely damaging to the UK economy nevertheless donated more than £870,000 to achieving precisely that outcome; an outcome from which, had he been right, he stood to earn a very large profit.  Am I the only one who wonders whether there might just be something wrong with a political system under which this can happen?

Winners - and losers

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Remember how, not so very long ago, the gamblers and speculators did their very best to wreck the Euro in their greedy attempts to turn a few pennies?  We were told often and bluntly at the time that we should count our lucky stars that we hadn’t joined the Euro project, and that it had been doomed to fail from the start.

Since the referendum on June 23^rd, those same gamblers and speculators have seen a new chance to turn a few pennies by betting against the pound, and the result has been to drive the value of sterling down.  Strangely, those same people who told us when this happened to the Euro that this showed what a disaster the Euro-zone was now seem to be telling us how wonderful this is for the sterling zone. 

Of course, the situation is not identical, but there is one clear point of similarity, and that is that the movements in currency aren’t being driven (despite what the news reports regularly say) by ‘investors’ making their wisest guesses as to what the future holds, but by gamblers and speculators who allow their computers to trade autonomously in pursuit of very narrow margins by repeatedly buying and selling the same things.  It’s a complete distortion of what ‘markets’ are supposed to be about, namely fixing the price at a level acceptable to both those who want to buy a product and those who want to sell it.  It’s gambling, pure and simple – and like all gambles, there are losers as well as winners. 

And, just as with the problems of the Euro-zone, there’s no need to guess who the losers are.

Getting away with robbery

Tweet Bankers' squealing about people being beastly to them is nothing new.  Nor is the idea that people earning vast sums of money for undertaking activities which are of dubious worth at best end up sincerely believing that their salary in some way reflects their ability or value.

But arguing, in effect, that they should be allowed to continue to bend or break the rules as and when it suits them, and take reckless short term decisions in the hope of making a quick buck, and do all that with impunity, is surely an illustration of how far they have become removed from the real economy in which most of us live.

I’m not entirely convinced that the proposals to claw back bonuses for up to seven years go far enough to rein in the gamblers and speculators who masquerade as bankers, but it’s at least a start.  The real requirement is for multinational action to bring the money markets back under control and make them work for society rather than for the bankers.  But the problem we face is that those making the decisions genuinely seem to believe that the crash was just the result of a few bad decisions, rather than an inevitable consequence of the way in which we have allowed people to turn markets into casinos.

All power to the speculators

Tweet I really don’t know where to start with the latest post from Lib Dem AM Peter Black.  One of the world’s leading speculators (described in the blog as ‘a world leading expert on currency’ – I thought it was tongue in cheek, but apparently it’s intended to be taken seriously) has said, in effect, that if the intransigence of the unionist parties in the UK forces an independent Scotland to create a new currency, it will leave Scotland open to attack by speculators who will see the new currency as weak and therefore an opportunity to destabilise a whole country in the interests of making a profit.

Well, of course, any small country with its own currency is open to the same sort of unprincipled attack at any time; it doesn’t need to be a new country.  And the “financial meltdown that swept through the Eurozone” didn’t happen by accident either; much of that was the result of speculation as well.  (Yes, of course the countries concerned had a few problems of their own making, but it only became a wider crisis because of the actions of the speculators).  Any country and any currency are open to such attack at any time, regardless of size; it’s not just a problem for an independent Scotland.

The speculators need to have a fear to play on of course – otherwise they don’t all act in the same direction, and their gambles cancel each other out.  But the story here isn’t really about Scotland at all – it’s about the power that our political leaders have ceded to the casinos which pretend to be markets.

And the political answer that we need isn’t – or shouldn’t be – “you can’t do that because the speculators will ruin you if you do”, which seems to be the conclusion of the blog post.  What we need is co-ordinated action to take speculation and gambling out of the equation; we need to curb their power not bend down before it.

Decisiveness isn't just for others

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Yesterday, Gordon Brown came out strongly in support of David Cameron’s position on the Euro.  The former Labour Prime Minister and the current Conservative PM are united at last in demanding decisive action from someone else – Germany, apparently – to bail out the Euro zone. 

I’m sure that it’s far from being the first time that they have agreed – after all, their economic policies presented at the last election were almost identical – but they usually manage to avoid saying it, and somehow pretend that there is a huge gulf between them.  But then, Gordon Brown isn’t the only former PM to seek to wear the mantle of statesmanship after losing an election, even if the garment doesn’t fit him any better than it has fitted its previous wearers.

That decisive action is necessary is, as far as it goes, difficult to disagree with.  It does, however, rather gloss over the analysis of cause which should precede that decisive action.  And most of all, it glosses over the UK’s rôle in the Euro crisis.

Any financial crisis of this nature has two elements which combine to impact on its seriousness.  The first is the financial problem itself.  On that score, there can be little doubt that Greece, the centre of the current crisis, has got itself into something of a self-inflicted mess after, to all intents and purposes, having doctored the figures to qualify for Eurozone membership.  That is not to excuse those who could and should have spotted the doctoring, such seems to have been the scale of it, but the root cause lies with Greece itself.

If the crisis were limited to that, I don’t doubt that it would be manageable with good will on all sides, but then the second factor kicks in – the reaction of the ‘markets’.  The way this factor is usually treated, one might think that market reaction can be treated as though it were a rational phenomenon; a group of people taking a long hard look at the financial fundamentals before coming to a considered conclusion about the prospects, and setting interest rates accordingly.

The reality bears little resemblance to that.  It is more a case of a group of wild animals stampeding in a particular direction because one of them got spooked and the others are afraid of being left behind unless they blindly follow.  It is often irrational and subject to a herd mentality.

And that brings me back to the UK’s rôle in all of this – for where is the pre-eminent European habitat of these wild herds if not in the City of London?  And how have they been allowed such free rein to bring down whole economies in the interests of pursuing their own narrow financial interests if not for the deregulation – or studious lack of regulatory action - by the last five UK Prime Ministers, Labour and Tory alike?

We undoubtedly need some decisive actions, but two of those are in the hands of the UK PM himself.  The first is a firmer regulatory control over the speculation and gambling in the City, and the second is the financial transaction tax which both parties in government have so firmly rejected.  Neither of those actions would do anything to touch the underlying problems, but they might help, at least a little, to stop the exacerbation.

But the UK Government seems intent on doing exactly that of which so many accuse (with some justification) the Welsh Government – criticising others as a substitute for acting themselves.

Fiscal Union

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Staying on the European theme, the latest conventional wisdom seems to be that the difficulties of the Eurozone prove that the UK’s decision to stay out was the right one.  I’m not so sure – the problem is that we only get to run history once, so it’s impossible to be certain how things might have turned out if a different decision had been taken.

It is surely at least possible, however, that the currency itself would have been stronger and more able to resist speculative pressure if the UK had been part of it from the outset. 

It’s not just that the UK is the third largest economy in the EU, and that having one of the biggest players staying outside was inevitably going to cause continuing doubt about the project.

It’s also that, by staying outside the Eurozone, the UK did two other things which were less than helpful.  Firstly, it provided a home within the EU itself for the financial speculators who have done so much to undermine the Euro in particular and the global economy in general.  And secondly, sterling provided an alternative currency to use in financial trading on those markets – credible alternative currencies are a key element in the operation of the financial markets.

I doubt that such considerations will affect for one moment the view of those who have been hostile to the single currency from the outset; and as I noted above, I cannot be certain that things would have panned out very differently.  My point, though, is that those who are claiming that the UK Government’s decision was the ‘right’ one cannot really be that certain either.

One other point, almost as an aside.  If it is true – as many are now claiming – that monetary union is impossible without fiscal union, where does that leave the idea – proposed by some nationalists – that an independent Wales could continue to use sterling? 

It’s not an exact parallel, of course, but neither is it a completely irrelevant one.  Being part of a monetary union implies similar fiscal policies; the lack of that has been the Euro’s weakness, and the need for it the justification of many for staying out.  Those fiscal policies can either be set jointly, in some sort of club or federation, or be set by the larger partners and imposed on the others. 

That’s the choice facing the Eurozone; it would also be the choice facing members of any sterling zone.

In whose interest?

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In response to sustained pressure from his own backbenchers, David Cameron has strongly stated that whilst his top priority for the Euro summit is to find a solution for the Eurozone, he will veto any changes which threaten the UK’s interests.  So far, so good; it’s difficult to argue against that in principle.

What’s a lot harder to see is how a failure to achieve a solution to the crisis can possibly be more in the interests of the UK than being prepared to yield a little.  And for the Prime Minister even to talk in the terms he’s been using almost invites the speculators to continue betting on a failure to reach an agreement.

But what’s least clear of all to me is how he is deciding what is, and what is not, in the interests of the UK.  It seems to boil down to protecting the rights of the speculators and gamblers to continue the sort of activities which have done so much damage over such a lengthy period.  And protecting their interests is not at all the same thing as protecting the UK’s interests – in fact, there are plenty of people who might suggest that the two are actually in direct conflict.

It makes for good rhetoric, and cheers up his own supporters (including those people in the City who make such generous donations to the Conservative Party), but it will surely look to many as though he is prepared to go on sacrificing the interests of the many so that the few can continue to enrich themselves at our expense.

Controlling the markets

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Marcus draws attention to the extent to which ‘the markets’ now control policy, with governments being mere bystanders.  The Observer article to which he links also underlines the way in which governments are being changed undemocratically to satisfy ‘the markets’.

Saturday’s Western Mail had a leader column on the Eurozone crisis, which argued that two things are now necessary.  The first is that Germany must take the lead, and the second is that ‘the markets’ must give the Eurozone time to breathe.  I don’t know whether the first will happen or not; but I’m confident that the second won’t.

There is a tendency for politicians and commentators to imbue ‘the markets’ with rather more rationality than is actually justifiable; the idea that they should also show some responsibility or compassion to the people of countries such as Greece and Italy is about as likely as porcine aviation.

The economic idea of the market acting as Adam Smith’s ‘invisible hand’ to match buyers and sellers has long since been lost in the financial sphere, as individuals and organisations have realised that they can make money for themselves by speculating rather than buying or selling anything, let alone investing.  But as with any other type of gambling, one person’s profit is another person’s loss.  And the losers, in this case, are most of us.

If the speculators believe that they can make a profit by bankrupting a country or two, undermining a currency, or bringing down a few leaders, then no appeal to their better nature will stop them.  And even if it did stop some of them, there would simply be others who would pounce on what they would see as weakness to line their own pockets.

That doesn’t mean that the WM leader writer is wrong to want to see the markets giving the Eurozone a break; it just won’t happen voluntarily.  We sometimes seem to forget that the markets are a human artifice, not something with an objective existence of their own.  They were created to fill a social need, but have been subverted in the interests of the few – it’s another example of the 1% and the 99%. 

If we wanted, collectively and internationally, to re-assert social control over them we could do so.  The fact that so many of our politicians are unwilling even to countenance that merely underlines the extent to which those who benefit from the system also control the political agenda.

In many other contexts, people who enrich themselves at the expense of others, even whole countries, would be regarded as criminals.  Why do we allow ourselves to be so beholden to them?

It's an ill wind...

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That would be a kind interpretation of what one trader had to say about the possibility of a further economic collapse.  Too kind, in fact – far too kind.

It’s unclear whether he’s as central or as influential as he makes out, but I suspect that he’s only saying what many others of those involved in the ‘markets’ are thinking but have more sense than to articulate so publicly.  There will be many of them who have been placing large bets on a negative outcome for the Eurozone in the hope of enriching themselves and their clients at the expense of ordinary working people in countries such as Greece.

So what?  What’s wrong with a little flutter, whether on the horses or on the markets?

The problem arises when the act of betting starts to affect the outcome of the event on which the punters are betting.  In horse racing, it doesn’t matter how many people back the favourite; the amount of money bet on a particular horse will not affect that horse’s performance directly.  (It may encourage dishonesty or nobbling, of course, but that’s an indirect effect). 

In the money markets however, the betting directly affects the outcome.  This isn’t a case of a quiet wager between friends about where prices will be tomorrow or next week; these bets are made by trading in the instruments, and that trading affects the price.  If enough people bet on a particular outcome, then that outcome becomes more likely.

Supporters of the financial markets would argue that the outcome in fact reflects the collective wisdom of the experts in the field.  From that perspective, it’s a bit more than a mere gamble, because it’s about predicting what is likely to happen and planning to benefit from that outcome.  So, if collective wisdom says that Greece is going to default, then protecting themselves and their clients from the effects of that is just doing their job.

It is the fundamental untruth behind that apparently reasonable line which the comments of this one trader expose so clearly.  The betting on a Greek default isn’t driven by collective wisdom at all, but by naked self-interest.  They want Greece to default so that they can make money as a result.

The question for the rest of us is why we allow the financial system on which our daily lives depend to be run in such a fashion.  Why do we allow capital to remain as king?

Ozonomics

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The way the turmoil on the stock markets has been reported, it appears all to be a matter of  a lack of something called ‘confidence’ by people called ‘investors’.  Whatever this ‘confidence’ stuff is, it seems to be pretty elusive.  ‘Investors’ can be full of it one day, and completely devoid of it the next, it would seem.

I’m far from convinced that ‘investors’ is the right description for people and organisations who are buying and selling stocks on the short timescales which are at work here.  Gamblers and speculators seem to be much more accurate terms.  They’re looking to maximise their own short term profits, or at worst minimise their own short term losses; ‘investment’ is surely a more long term activity.

It’s also not made entirely clear in what they have lost their ‘confidence’.  There’s no obvious reason why a company which was worth £x yesterday is suddenly worth a lot less today, nor why its performance is suddenly going to worsen.  I suspect that what these ‘investors’ have really lost their ‘confidence’ in is each other.  They are acting on the basis that someone else might sell before they do, so they’d better get their retaliation in first, or else they’ll lose out.  From then on, the herd instinct takes over.

It’s a dubious strategy over the long term, even in a casino.  But as a way of driving the world’s economy, it’s a lot worse than dubious.

Since this ‘confidence’ seems to be entirely a matter of belief rather than anything tangible, rational, or measurable, perhaps what we need is an all-powerful wizard to issue confidence certificates to anyone who’s feeling a little short of the stuff.  And if it turns out to be no more than a small man with a loud-hailer behind a screen, that doesn’t really matter – once people have their certificates, they’ll be fine.

I’d like to think that this was a tongue-in-cheek suggestion, but I wonder whether it is really very far from the reality of the system which we allow to control us.

Theft and blame

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Most people working in a large organisation will have seen the game of ‘Credit-stealing / Blame avoidance’ being played.  When things go well, everyone wants the credit – but when they go wrong, someone else is always to blame.

There’s also a power element to the game – the higher up the tree you get, the more people there are below you from whom you can steal credit or on whom you can dump blame.  It’s not unrelated to the habit of organisations which sack the workers when things go badly, and reward the managers when things go well.  Or in some cases reward the managers when things go badly, even before they sack the workers.  (This story about a boat race between a Californian team and a Japanese team expresses the attitude at its worst.)

Governments are not above a little bit of theft/ avoidance either.  I don’t doubt that if yesterday’s figures for the past quarter’s growth had been somewhat better, it would all have been the result of the magnificent economic management of the UK Government, and would have proved that we were on track.  But they weren’t, so it’s all the fault of those royals deciding to get married at a time of the year when there are two many bank holidays already.

And if there hadn’t been a royal wedding, then no doubt it would have been down to some other special factor, or, as a last resort, the overall world economic situation.  No matter what the outcome, there was never any danger that government policies would have been responsible for poor performance, nor that poor performance could in any way suggest that the government was on the wrong track.

Given the way that globalisation and multinational capital have led us into an increasingly intermeshed economy, I’m not sure how much difference government policy – even at UK level – really has on the fundamentals of economic growth and overall performance.  It certainly has an effect on who pays the price of failure, and alternative approaches could have shared that cost out much more fairly.  But I really do doubt whether a marginally different approach to spending and taxation (which is where the political debate has centred) could ever have had a significant effect on the GVA figures.

Most of the decisions which affect the economic fundamentals are not only outside the government’s control, they are outside any democratic control at all.  They have been outsourced to the markets and the money men; the speculators and the gamblers.  Unless and until we assert control over capital, it will continue to control us – and government claims or denials about economic performance will continue to be mere froth.

Still at it

Tweet According to yesterday's Sunday Times, 3.5% of the market value of FTSE100 companies has been lent to hedge funds to be short sold in an enormous bet that share prices will be falling. It's not as high as the 5% which was on loan during the financial crisis in June 2008, but it's still an awful lot of shares.

The short-selling game means that the hedge funds who have borrowed the shares sell them for one price and then buy them back at a lower price before returning them to their rightful owners, and pocketing the profit. Well, actually, they profit most of the profit; part of it goes to the Conservative Party, and part gets paid to the people who loaned them the shares in the first place.

But if they've made a profit, who's made the corresponding loss? After all, when it comes to share-trading, every profit must be balanced by a loss somewhere. The answer is that the owners of the shares – often pension funds, which effectively means an awful lot of us - have made the loss; they loaned the shares when they were valued at one level, only to get them back when the price has fallen. The total value of their assets has fallen by the difference.

Well, not quite. Because the hedge funds have paid them a small 'rent'; a share of the profit for the loan of the shares. So their loss is less than it would have been if they hadn't loaned the shares out. From their point of view, it's an apparently rational decision, because if the price was going down anyway, then they may as well mitigate the loss by taking at least a share of the profit made by the short-sellers.

But the really big question is whether the price would really have fallen anyway - to what extent are short-sellers simply betting on something that would happen anyway, and to what extent is the volume of selling which they do actually influencing the price on which they are betting? The greater the volume of shares that they can sell, the greater the influence they have on the outcome.

If they are influencing the price by their selling, then the action of those who lend them the shares to sell becomes a great deal less rational; they are then, after all, creating the loss which they are seeking to mitigate. They'd still do it though, for the simple reason that if others do it and they don't, then they still get hit by the losses but have none of the mitigation, and that affects their overall financial performance.

The practice is crazy when it's just betting; but it's insane if the people creating the losses are doing so deliberately purely because everyone else is doing it, and they can't afford to be left out. It's more Prisoner's Dilemma than roulette. 3.5% sounds like a small proportion, but it's enough to drive prices rather than simply bet on them.

Short-selling does not create wealth – it simply redistributes wealth from the many to the few. It should be outlawed.

Just moving it around

Tweet Bonuses are a part of the remuneration package of a lot of people in a lot of jobs; it isn't just bankers that benefit. And in principle, rewarding those who achieve targets can help to improve the effectiveness of organisations. There are, however, legitimate questions to be asked about the size of bonuses, and the basis on which they are paid.

It's a mistake to lump all 'bankers' together as though they were all the same – they are not. But they're not all in line for big bonuses either. The bankers who do the more mundane day to day stuff which we all depend upon to manage our money are performing a useful function - but they're not the ones in line for the big payouts. No, it's the gamblers and speculators; the ones who take all the risks with other people's money - they're the ones lining up to claim their rewards.

What some of the people in the financial services sector seem to be unable to understand is that it isn't the mere fact that they want to pay themselves bonuses which raises hackles; it's a combination of the size of those bonuses and the relationship (or lack of) with their contribution to the success of the organisations for which they work.

There is a great deal of difference between making people wealthy, and creating wealth. There is no doubt that the gamblers and speculators achieve the first; some people (and not just the bankers themselves) have become very wealthy as a result of their activities. But it isn't because they have actually created any wealth; all they've done is to move it around a bit.

Like Robin Hood in reverse, they actually take a little from the many to give a lot to the few. In that sense, their activities have not only been socially useless; they have actually been detrimental to the interests of most of us. The fact that some of them have threatened to take their 'skills' elsewhere unless they are allowed to be paid that to which they think they are entitled shows only how far removed they are from reality. I'm tempted to say 'let them go'; my problem is that I wouldn't wish them on anyone else either.

Anti-Social Behaviour?

Tweet Last week, the Tories returned to the theme of anti-social behaviour, this time with a scheme to 'ground' children aged from 10 to 17 for up to a month. Their argument is that they want to stop the young people concerned from growing up into a life of crime.

I don't dispute for one moment that there is such a thing as anti-social behaviour. I won't even dispute that there are a minority of young people who can cause problems from time to time, although that which is these days referred to as anti-social behaviour sometimes looks more like tabloid-driven over-reaction.

But anti-social behaviour comes in other forms as well. I think I'd argue that the sort of behaviour which helped to drive banks out of business and wreck the economy is pretty anti-social as well. I'm not sure that I'd go as far as the former Soviet bloc and try those responsible for 'economic crimes'; but I wouldn't allow them to carry on regardless either.

Surely, the fact that the Tories (and to a lesser extent Labour) have benefited financially from the latter sort of anti-social behaviour couldn't be the reason for the difference in approach?