2023 FUTURE OBSERVATORY
2023 FUTURE OBSERVATORY
A significant development in the financial markets was that of the new found freedom to arbitrage over time; now dignified, as a group of processes, with the term 'derivatives'. The importance of the market was no longer to be where it currently stood; a rational, measured reflection of the net worth, for example, of quoted stocks. The importance is now in where it will be; albeit in just a few micro-seconds - in which short time the new computerised trading systems will be able to turn a profit. The blinkered focus is, in this way, always on trends and never on what underlies them. All is relative, and none is absolute.
The nature of the new markets is, therefore, of vast capital flows surging towards perceived future changes; no longer constrained by any need to reflect actual events. The analogy of the casino is justified; where the obsessive preoccupation of the participants is with predicting how the other players will place their future bets. Keynes described this mentality as 'animal spirits'. Students of poker might use other terms; and, indeed, Keynes also talked about such behaviour in terms of a financial casino.
In this casino there are three distinct groups of participants. The majority comprises the players; those who are staking their all, or at least their investors' all, on the outcome of the game. The two minorities are the regulators, those who would ensure that the game is played according to the rules, and the clients, those whose businesses would still seek to use the markets to raise capital for their operations. Traditionally the regulators role has been to protect participants, the players - not least by deregulation (as we saw in the 1980s)!. Increasingly it is now to protect the innocent bystanders, those victims in the real world whose livelihoods are being put at risk by the games played. To have any impact, though, the regulators increasingly have to become players themselves - backing their own currency, say, as the UK government so disastrously tried to do just before it ingloriously left the ERM - since, as already indicated, this game is more akin to poker than to roulette. Whether governments make good poker players is yet to be proved; but the record to date suggests that they do not; and have probably already thrown in their hands! In reality, gaining control over global financial markets now demands global actions - not national ones - with a degree of co-ordination which is currently almost impossible.
It is possible that President Mitterand's dying wish, echoing the 'Tobin-Tax - first proposed by the Nobel laureate James Tobin in 1971 - that a 0.5% tax (or even a 0.05% tax, it depends which version you read) be levied on each financial transaction, may eventually be taken up. This is ostensibly to fund the development of the Third World, undoubtedly a worthwhile cause in its own right, since it is estimated to yield about $1,500 billion a year - or more than 25 times the present level of Overseas Development Aid (ODA), But it goes much further, for it is a cunning, and potentially very effective, solution to the problem of speculation. It would have little impact on long term investment, but would make short term speculation too expensive to consider! Needless to say, just a few discrete months later - after President Mitterand had stepped down as President of France - the idea was dropped, after pressure from the US and Britain, on the pretext that it might have impeded international financial flows (exactly what it was almost certainly supposed to do!). Some day, though, its turn will come.
21 April 2003
Other pages you might like to consider are:
5004 GLOBAL ECONOMICS, 5042 THE GLOBAL CASINO, 5066 KEYNESIANISM AND BRETTON WOODS, 5004 GLOBAL ECONOMICS
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