2023 FUTURE OBSERVATORY
2023 FUTURE OBSERVATORY
Until recently at least, the financial markets were seen by Western governments to be the embodiment of all that makes free enterprise such an all-conquering ideology. They were seen to enshrine the philosophies, and the virtues, of the heroic entrepreneur; who alone can create the wealth of these nations. But in reality the markets have moved on, and the prevailing myth today hides another great and growing industry - that of professional gambling on a global scale. The pensions of teachers are wagered alongside the earnings of the multinationals - and this is starting to worry even the most conservative governments.
At the most basic level they no longer operate as the major source of external capital for new ventures. That role - for the relatively small proportion of corporations that do not now fund all new developments from their existing cash-flows - has been largely assumed by the banks. Neither do the markets now generally seek to act as a lever for shareholders to maintain control over their wayward charges. That role has been largely subsumed by the legislators. In recent years, though, the major change has been in the way that activities which occupied the dealers' Victorian predecessors for months are accomplished today in micro-seconds, even though they may span three continents rather than the few paces of the old trading floors. The resulting superficial changes were soon obvious, as any devotee of televised business programmes could testify. The financial icons, of the vast trading floors with their hundreds of screens, became the visual symbols of the 1980's. But these superficial changes were accompanied by two less obvious, but more fundamentally important, developments.
The first of these arose from the scale of operations which the new technology allowed. The resulting surges of money, micro-second by micro-second - backwards and forwards across three continents, came to dominate all money flows. The long term movements originating from the underlying activities that served the real business world, which still existed outside these electronic networks, were puny by comparison, and were accordingly swamped. Buffeted by the electronic storms which ripped across these networks, the real trade flows (which now represent less than a tenth of the total - ninety per cent being pure speculation) became perversely disadvantaged by the markets whose sole justification previously was to be their servants. Eventually even governments could not withstand such pressures - hence their increasing disquiet; though it is fair to report, however, that the supporters of free market economics see all of this as being for the best. There is, though, another price to be paid. Stephen Zimmer and Robert McAuley - two economists at the Federal Reserve Bank of New York - calculate that over the last thirty years British banks have been required to make returns of 9.8 per cent on average, and US banks an even higher 11.9 per cent; compared with 3.1 per cent for their Japanese equivalents.
The outcome was that, where in earlier times these capital flows might ultimately have reflected the real, operational flows, they took on an independent life of their own. Today the real flows must, in some distorted way, mirror the imaginary.
Though it has not yet happened, the major dislocation in the financial markets will come when the Euro finally establishes itself as a viable reserve currency alongside the dollar; and, in particular, when most oil transactions come to be priced in Euros. When this happens, which may not be too far away now that the Euro has established itself and the US is set on offending most oil producers, the US will no longer be able to count on the strength of its currency to attract the investors needed to offset its massive current account deficit. When this happens the resulting Wall Street crash may also (temporarily) drag down exchanges around the world.
Hazel Henderson reports "Thus, the global casino is now spinning into cyberspace - divorced from any understanding of the whole picture..."
Bezanson & Mendes report that "...over US $1 trillion (1012) worth of foreign currencies change hands each day...", adding, with a degree of understatement, that this leads "...to concern in several quarters, including central banks, over market volatility and even meltdown." Kenichi Ohmae reports that "With the speed and volume of transactions in the global capital market, national governments cannot control exchange rates or protect their currencies, and political leaders find themselves at the mercy of people and institutions making economic choices over which they have no control." Morris Miller, for instance, says that "...the issue of control of these offshore financial activities has emerged recurrently as a priority item on the agenda of meetings of the G-7." If they worry, and yet can do nothing, what should we do - burn down the exchanges?
Pam Woodall puts the problem into a wider perspective "Over the years, democratic governments have fought many enemies, from fascists and communists to monopolists and over-powerful trade unionists. One way or another, they have defeated them all. But now a new, more insidious enemy has appeared on the scene, who, many claim, has already accumulated far too much power while no one was looking: the electronic army of currency and bond traders. As the world economy seems to lurch from one financial crisis to another, the blame is being put on financial markets." At the moment they are, indeed, the worst enemy of almost all governments; but, such is their new-found power, no government is willing to take up the challenge they have posed. Pam Woodall explains that, in any case, "Experience shows that policy co-ordination between the three big economies [which would be needed to combat the global financial markets] is politically impractical, because governments are not willing to subordinate national economic policy to an international target."
Leadbeater & Mulgan explain the new strengths of financial operators more basically "Governments which used to fear the power of trade unions now run scared of foreign exchange dealers." Indeed, they run so scared that they will not even admit to the problem - but accept the demands of these financial markets as the basis for their new economics. Will Hutton[b] believes the position is even worse; "...[states] crave price stability and the approval of the global bond markets for their fiscal rectitude. Independent central banks are worshipped as guardians of monetary order and low inflation. It is no surprise that...inflation, at under 3 per cent, was at a thirty-year low. This is a conscious choice of the world's leading industrial counties; and of the global financial markets who, on the other hand, accept no responsibility for the 35 million unemployed which is the price which has to be paid for this."
Newt Gingrich says that "The economic world has been transformed by the rise of a world-wide real-time information system and the growth of faster and less expensive means of communication. As people know more and more about opportunities across the planet, they shift their money to pursue marginal advantage without regard to national boundaries. In recent years the private flow of money has dwarfed anything the various national banks could do." Even Pam Woodall, who is generally critical of the power financial markets have gained, says "Financial liberalisation has delivered huge benefits. A free capital market ensures that savings are directed to the most productive investments without regard for national boundaries", but she adds "There is no free lunch. The price governments have to pay in this instance is a weakening of their traditional economic armoury..."
There is a price to be paid. Stephen Zimmer and Robert McAuley - two economists at the Federal Reserve Bank of New York (reported by Will Hutton) - calculate that over the last thirty years British banks have been required to make returns of 9.8 per cent on average, and US banks an even higher 11.9 per cent; compared with 3.1 per cent for their Japanese equivalents. Will Hutton[b] makes the general observation "The freer and more dominant the stock market, the higher the returns required from banks..." and thence from their customers!
Hazel Henderson, again, says that "Worried central bankers and national politicians, trying to stave off such scenarios [of financial collapse], are left with failing textbook economic remedies to support their domestic economies and currencies...Finance ministers acknowledge the loss of domestic controls as well as diminished tax revenues which came with the financial deregulation of the 1980s...Nowhere is the widening gap more visible than in the gap between the explosion of computerized global financial trading [over 90% of which is, as we have seen, speculative] and the so-far feeble efforts of finance ministers, bankers and international bodies...This new framework [she feels is needed to rectify the situation] is essential and must be global and as 'real-time' as the markets themselve." Will Hutton highlights the current problems when he says "The whole system of financial regulation and accountability has been found wanting. Leading firms of accountants have been unable to see fraud under their noses, signing off accounts as representing 'a true and fair view' of companies that were about to go bankrupt or be exposed as fraudulent. The system of self-regulation has been irretrievably compromised by the financial services industry's own interests."
Javetski & Glasgall predict that "Supercurrencies spanning entire regions may emerge, dwarfing Western Europe's recent quest for one unit of exchange." Lester Thurrow notes "Jumping from national economies to a one-world economy is a leap too big to make. As a result regional trading blocks are emerging as natural stepping-stones in an evolutionary process toward a truly global economy." On the other hand, he notes that this means "Market access will be a privilege that has to be earned and not a right that is bestowed automatically", and he notes that "In theory the new World Trade Organization (WTO) set up at Marrakesh is supposed to develop new rules, but it is an empty organization with no leaders and a voting procedure (one country, one vote) that guarantees it cannot design a new system."
Lawrence et al suggest that "Today, border barriers have almost disappeared among developed countries. Import quotas are rare and industrial tariffs are low...Capital flows freely...and a general trend toward deregulation and financial innovation now give private parties unprecedented freedom..." with the result, they claim, that "In combination, they have produced the most rapid half century of economic advance in world history."
26 April 2003
Other pages you might like to consider are:
5004 GLOBAL ECONOMICS, 5058 FINANCIAL MARKETS, 5066 KEYNESIANISM AND BRETTON WOODS
hits
Copyright © 2005 Future Observatory