Speculation rests on phenomenal amounts of money sloshing around the globe. We could call this endless wave a permanent tsunami, except that would grossly understate the size of the financial wave.
If we could pile up all the money that is exchanged in financial markets and make a literal wave out of it, it would make for an astounding sight were we on the International Space Station, towering above the clouds. The wave would rise so high it might swamp the space station itself.
All right, I am getting fanciful here. And we wouldn’t want to contemplate having to bail out the space station in zero-G conditions. But we are talking about an international financial industry that has truly grown to monstrous proportions, beyond any reasonable necessity.
How big? The combined daily trading average on the world’s foreign-exchange, bond and stock markets is very roughly about US$6 trillion. If that total seems amazing, it is for good reason: By way of comparison, the gross domestic product of the world is about $65 trillion. To put it another way, in 11 business days financial speculators trade instruments and contracts valued at more than all the products and services produced by the entire world in one year.
Most of us are familiar with stock exchanges, and that is the financial market that draws the lions’ share of corporate mass media attention. But that is actually only a tiny portion; an average day’s turnover on the world’s stock markets amounts to $270 billion. Bond markets (government debt, corporate debt and the myriad of “asset-backed” securities continually cooked up) are several times larger, and foreign exchange is vastly larger than bond markets.
Much of this daily $6 trillion turnover is in derivatives, swaps, futures contracts and assorted legerdemain. Almost all of this is nothing more than self-interested speculation; trading for the sake of the largest possible short-term profits regardless of the cost to the rest of the economy or the destabilizing social costs of these giant pools of capital sloshing around the world, pouring in capital here and pulling capital there as opportunities for short-term profits wax and wane.
Why do stock markets exist?
In theory, stock markets exist to distribute investment capital to where it is needed and to enable corporations to raise money for investment or other purposes. In real life, neither is really true. A corporation with stock traded on an exchange can use that status to issue new shares, raising money without the burden of dealing with lenders and paying them interest. But large corporations can raise money in a variety of ways, for example by issuing bonds or other interest-bearing debt, or by selling shares directly to private investors.
Nor do corporations necessarily wish to float new stock — doing so is disliked by investors because profits are diluted when spread among more shares. Instead, it is more common for large companies to buy back shares of their stock (at a premium to the trading price), which means less sharing of distributed profits.
From 1981 to 1997, for example, non-financial corporations in the United States bought back $813 billion more in stock through buyback programs and corporate takeovers than they issued.* That is money that was diverted from investment, employee compensation or community development, and constitutes still more money stuffed into financiers’ pockets.
Most of the action on stock exchanges is simply speculation, and as computers become more sophisticated, the speculation drives higher trading volumes and becomes more remote from the actual business of the company in which stock is bought. “Day trading,” where speculators buy and sell stock within minutes to earn profits on price fluctuations became common in the 1990s, but in the following decade the big Wall Street firms showed their muscle while bringing speculation to an unprecedented level.
These firms created sophisticated computer programs that buy and sell stocks in literally milliseconds. The programs issue thousands of buy orders that are canceled in minuscule fractions of a second in order to manipulate prices to the benefit of the computer owner. These price differences are only pennies, but are done on such enormous scale that the profits skimmed in this fashion are estimated to be as high as $21 billion per year — only a “handful” of these high-speed computer traders account for a majority of all stock-exchange trades.**
Speculation for its own sake
Speculation tends to reinforce itself. During the two years I spent working on a financial news service during the 1990s stock-market bubble, I repeatedly heard traders say the dramatic price rises could not last but they would continue to ride the bubble as long as the consensus view that the long bull market would continue remained in place. The primary reason for why market players believe stock prices will rise at a given time is because they believe other market players believe stock prices will rise. Not nearly as “scientific” as financiers would have you believe.
Bond and foreign-exchanges markets are no less fueled by speculation, and it is the gargantuan size of these markets that give the larger players in them the power to dictate to the world’s governments, extracting budget-busting bailouts, imposing austerity and raising their needs above all social considerations.
Their size is truly monstrous: the world’s 1,000 largest banks held an estimated US$102 trillion of assets in 2011. Separately, the “shadow banking” system (hedge funds, private-equity firms and other investment companies) is worth an additional $67 trillion.*** Financiers hold an amount of capital that is more than two and a half times larger than the world’s gross domestic product.
As more money is diverted into speculation because there are insufficient opportunities for investment, the size of the financial industry and the percentage of corporate profits claimed by the financial industry steadily grows — the size of both banks and unregulated “shadow banks” have increased since the beginning of the economic crisis in 2008. This capital is a function of the amount of money flowing upward to the rich becoming larger than they can use for personal luxury consumption or investment; these torrents of money are diverted into increasingly risky pure speculation.
Too much money comes to chase too few assets, rapidly bidding up prices until there is no possible revenue stream that can sustain the price of assets bought at inflated levels, triggering a crash. The very size of financial markets is a major contributing cause of economic instability. That size is in turn a product of the continual downward pressure on wages — an increasing share of corporate revenues go toward executive pay and profits as the share going toward wages declines.
A financial industry swollen to such gargantuan sizes have no relation to the actual needs of the economy. It is money that could be used for wages (which would strengthen the economy) or for productive investment were it not so concentrated and under-taxed. Austerity, after all, is only for working people.
* Doug Henwood, Wall Street [Verso, 1998], page 3
** Charles Duhigg, “Stock Traders Find Speed Pays, in Milliseconds,” The New York Times, July 24, 2009
*** TheCityUK; the Financial Stability Board