Instruments: What Does Finance Look Like?

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Dwight Glenn
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1 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / 1 Third Lecture Instruments: What Does Finance Look Like? In what sense are bonds and stocks income generating? In what sense are currencies, commodities and derivatives income distributing? Money Neutrality or power? Inflation does the tide really lift all boats? Money: is ownership unreal? Instruments Finance as capital Value = expected future income / (rate of interest * risk factor) Debt, equity, commodities, derivatives income-generating vs. income redistributing Debt Promise vs. expectation Bond value = interest payment / (rate of interest * risk factor) How the rate of interest is determined? Government debt and taxation: commodifying state power Government debt and the birth of capitalism The bond market Liquidity and benchmarking Monetary policy: short term rates, long-term yields what determines what? Fiscal policy: government deficit, government debt Equity Equity vs. debt Balance sheet and income statement Interest debt Profit equity Equity value = expected profit / (rate of interest * risk factor) Bigger returns, bigger risk Stock prices and the economy: a very imperfect fit Securitization and the commodification of power Equity and the corporation Capitalization: mother credit Structure of corporate finance Capitalism: debt-based versus equity-based Redistributive investment Currencies, commodities and derivatives What makes the exchange rate move relative prices, relative return, speculation Commodities: the roulette of finance Derivatives: the Russian roulette of finance Risk transfer and stabilization C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

2 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / 2 Capitalization: capitalisation excpected earnings risk normal rate of return $1bn $6mn US GOVERNMENT BOND PRICES AND INTEREST RATES PRICE (left) INTEREST RATE NOTE: Data based on long term government bonds. SOURCE: DRI USStkBon.xls C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

3 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / 3 2 US INTEREST RATES (%) Long Term Treasury Bonds Federal Fund Rate NOTE: Series are expressed as 3-month moving averages. SOURCE: US Federal Reserve Board; DRI 8, US GOVERNMENT DEFICIT AND DEBT ($billions, 1996 prices) 1,2 6, GOVERNMENT DEBT (left) 1, 8 4, 6 2, 4 2 SURPLUS DEFICIT -2, -2 FEDERAL BUDGET BALANCE -4-4, SOURCE: DRI. US-R-M1.xls; US-FA1.xls C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

4 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / 4 1 US Total Return (Annual % Change) 8 S&P Year US Government Bond SOURCE: Global Financial Data 1,,. US Total Return (with reinvested dividends and interest) log scale 35 1,. 3 1,. S&P 5 (left) 25 1, Year US Government Bond (left) =1 Stock/Bond Ratio SOURCE: Global Financial Data Total Return Indices.xls C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

5 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / STOCKS PRICES AND THE ECONOMY (annual % change) REAL GDP* REAL STOCK PRICES S&P5 (left) * Converted from quarterly figures. NOTE: Series are expressed as 12 month moving averages SOURCE: DRI STOCK PRICES, EARNINGS AND INTEREST RATES (annual % change) REAL STOCK PRICES S&P5 (left) DISCOUNTED EARNINGS* * Long term earnings divided by long term bond yields NOTE: Series are expressed as 5-year moving averages SOURCE: DRI -45 SP5-M1.xls C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

6 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / 6 16 Credit to Private Sector / GDP (%) OECD 6 EAST ASIA & PACIFIC 4 2 DEVELOPING COUNTRIES SOURCE: WORLD BANK Capitalization-world.xls C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

7 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / 7 25 MARKET VALUE OF US CORPORATIONS (% of GDP) 2 EQUITY DEBT *Equity FFUNDS code: , Corporate debt FFUNDS code: , SOURCE: Federal Reserve Board; US Bureau of the Census; DRI. 7 US COPORATE EQUITY TO DEBT RATIO *Equity FFUNDS code: , Corporate debt FFUNDS code: , SOURCE: Federal Reserve Board; DRI. US-FA1.xls C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

8 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / 8 3 Capitalization and Capital Structure in 39 Countries* 25 South Africa Malaysia Market Capitalization / Domestic Credit (%) Peru Argentina United States Hong Kong United Kingdom Japan Switzerland Germany China Austria Domestic Credit / GDP (%) * Data points are averages of 199 and 1996 SOURCE: WORLD BANK; IFC; US Department of Commerce C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

9 Nitzan / 3275 GPE II 3. Instruments: What Does Finance Look Like? / 9 EXCHANGE RATES AND RELATIVE PRICES: GERMANY VS US EXCHANGE RATE ($ / DM, left) RELATIVE PRICES (US CPI / GERMAN CPI, right) SOURCE: IMF; DRI 1 PRICES (anuual % change)* 8 World Commodity Prices 6 4 CPI in the Industrialised Countries * In $US. SOURCE: IMF; DRI C:\Cabinet\Courses\Y3275\Lectures 26-7\nitzan_y3275_3_financial_instruments_handout_26_7.doc *** Last saved on: 5/1/26 9:12 PM *** 261 words

Imports. Exports. T135 Figure 18-1 U.S. Exports and Imports as Ratios of GDP, Ratio to GDP

Imports. Exports. T135 Figure 18-1 U.S. Exports and Imports as Ratios of GDP, Ratio to GDP T135 Figure 18-1 U.S. Exports and Imports as Ratios of GDP, 1929 1998 0.14 0.12 Imports 0.10 Ratio to GDP 0.08 0.06 Exports 0.04 0.02 0.00 1930 1940 1950 1960 1970 1980 1990 1998 T136 Table 18-1 Ratios