Monday, March 18, 2013

Derivatives and Economic parasitism

Did you know that the untaxed and unregulated global derivatives market is many times larger than the GDP of the entire world?

There are several estimates for the size of this untaxed and unregulated derivatives market. Some estimates range as high as $1.5 quadrillion ($1,500,000,000,000,000) which is around 18 times the size of the entire productive output of the world. The IMF are more conservative with their estimates, but they still conclude that the global derivatives market has remained, on average, over 8 times the size of world GDP since the economic crisis of 2007-08.

To the economic layman it is pretty difficult to envisage how the derivatives market can be so many times bigger than the actual economy. The question that is raised is how all of these derivative trades exist outside the "real economy" of the world.

The answer is not a simple one, but for the sake of brevity I'll simplify it. Let's think of the GDP of the world as all of the actual goods produced and all of the services provided in the world in a year (the "real economy"). The derivatives market is like an untaxed, unregulated betting shop, where financial sector players can put bets on which of these "real economy" trades and transactions will succeed and which will fail.

As part of the financial sector deregulations inspired by the Randian neoliberal brigade, derivatives were exempted from regulation and taxation by the US authorities by the Commodity Futures Modernization Act of 2000. This legislation was like removing all regulation from the betting shop, allowing punters to have unlimited credit, allowing the bookies to rig the markets and to provide odds that they have absolutely no possibility of paying out on, then to top it all off, exempting the whole lot from taxation.

Following this deregulation the derivatives market boomed and rapidly grew to many times the size of the "real economy" of the world. In 2001 the derivatives market was around 9 times the size of the entire US economy, by 2008 it was more than 40 times as large.

Derivatives (like Collateralised Debt Obligations and Credit Default Swaps) were at the very epicentre of the global financial sector meltdown, yet since 2007-08 virtually nothing has been done to re-regulate the market, which has continued to grow faster than the real economy of the world.

To put the size of the derivatives market into perspective, if derivatives were included in the GDP of the world, banking activity would make up somewhere between 88%-98% of all the trade in the world. This means that in terms of cash flow, a few banks on Wall Street and in the City of London do many multiples of the economic activity of every factory, power station, hospital, school, army base, retail outlet, mining operation, hotel, farm and public transport operation in the entire world combined.

The idea that a few banks are more financially productive than the rest of world economy is just ludicrous.

Ever since the global financial sector meltdown of 2007-08 it has been abundantly clear to anyone that takes an interest in such things, that the banks have driven themselves into insolvency through the ridiculous scale of their gambling. But instead of letting these institutions die (as neoliberal, free-market capitalism actually dictates) the governments of the world have decided to provide the largest state subsidies in human history to keep them afloat (and set about spreading the Great Neoliberal Lie: that the crisis was caused by excessive spending rather than financial sector speculation). 

The UK handed their financial sector over 90% of UK GDP in bailouts, Ireland, Greece, Portugal and Spain subsumed the vast debts of private banks onto their public debts, the European Central Bank has handed out over €1 trillion in ultra-low interest loans to the European financial sector, the US, UK and Japan have been printing money like mad to flood it into the financial sector, yet the banks steadfastly refuse to lend out any of these unprecedented state subsidies, because they need virtually all of it to cover their mind boggling gambling losses.

The fact that the ordinary citizens of the world are being made to pay the price of keeping these hopelessly insolvent financial sector institutions afloat (through austerity, sequesters, cash grabs, hidden inflation and the devaluation of currencies, pension funds, wages and savings) is a clear example of economic parasitism.

The banking sector is now like a gigantic cuckoo chick, relying on the tiny reed warbler (the real economy) to make enormous sacrifices to continue providing it sustenance. The reed warbler does all of the actual work, whilst the cuckoo chick takes all of the rewards.

The difference of course, is that the reed warbler doesn't recognise that the cuckoo chick it is raising as it's own offspring for the parasite that it is. However, more and more people are realising that the financial sector institutions that caused the economic crisis are now nothing more than financial parasites, feeding off, and weakening the "real economy" of the world in order to keep themselves alive.

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More articles from
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What is ... a Credit Default Swap?
Too big to prosecute
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The economic case against tax-dodging
What is ... hidden inflation?
The golden hammer of neoliberalism

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