Money, Markets, and Democracy

Transcription

1 Money, Markets, and Democracy

2 George Bragues Money, Markets, and Democracy Politically Skewed Financial Markets and How to Fix Them

3 George Bragues University of Guelph-Humber Toronto, Ontario, Canada ISBN ISBN (ebook) DOI / Library of Congress Control Number: The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Cover illustration: Mick Wiggins / Alamy Stock Photo Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Nature America Inc. The registered company address is: 1 New York Plaza, New York, NY 10004, U.S.A.

4 In Memory of Fernando Bragues ( ) Deixastes este mundo tragicamente cedo, mas nunca fostes esquecido nos meus pensamentos e trabalhos For Natalina Nazare dos Santos For Maria Bragues

5 ACKNOWLEDGMENTS I thank my colleagues at the University of Guelph-Humber for their support in this project. I wish to recognize Clive Cockerton who, as an Associate Dean at Humber College many years ago, spearheaded the introduction of a course entitled Money, Markets, and Democracy which was the inspiration for this book. Special thanks to my wife, Maria Bragues, for the great patience and understanding that she demonstrated throughout the entire writing process. While significant portions of the introduction and a few passages elsewhere are adapted from previously published work of mine, this book is not a republication of earlier articles. That said, I have drawn freely on the following: Voters and Debt Financial Post (September 1, 2011) The Politics of Financial Markets: An Introductory Discussion, Global and Business Economics Anthology, Vol 2, Issue 1 (2010): 6 16 Leverage and Liberal Democracy in Lessons from the Financial Crisis, Edited by Robert W. Kolb, 1 8. Hoboken: NJ, John Wiley and Sons, Freedom to Short, Financial Post (April 19, 2006) Futile Disclosure, Financial Post (July 27, 2004) Why Insider Trading Should be Legal, Financial Post (February 13, 2002) Free the Short Sellers, Financial Post (November 19, 1999) vii

6 CONTENTS 1 Introduction: Why the Markets Must Be Politically Investigated 1 2 Money Before Liberal Democracy 15 3 Money in Liberal Democracy 43 4 The Bond Market 75 5 The Stock Market The Derivatives Markets The Currency Markets It s All About the Money 275 Bibliography 285 Index 309 ix

7 LIST OF ABBREVIATIONS ABS Asset-Backed Security BIS Bank for International Settlements CDO Collateralized Debt Obligation CDS Credit default swaps CFTC US Commodity Futures Trading Commission ECB European Central Bank EU European Union Fed U.S. Federal Reserve System IPO Initial Public Offering IMF International Monetary Fund ISDA International Swaps and Derivatives Association LBO Leveraged Buyout LIBOR London Interbank Offered Rate MBS Mortgage-Backed Security Nasdaq National Association of Securities Dealers Automated quotation NYSE New York Stock Exchange OTC Over the Counter SEC Securities and Exchange Commission SIFMA Securities Industry and Financial Markets Association WFE World Federation of Exchanges xi

8 LIST OF FIGURES Fig. 1.1 Percentage of Large Moves in S&P 500 Attributable to Political Events, Fig. 2.1 Silver content of Roman coins, Fig. 2.2 Quantity of notes issued by Banque Royale, Fig. 2.3 French assignats priced in gold livres, Fig. 2.4 France cost of living index, Fig. 3.1 Spanish imports of treasure versus price level, Fig. 3.2 Number of democracies, Fig. 3.3 US and UK retail prices, Fig. 3.4 US and UK real GDP growth, with and without gold 60 Fig. 3.5 The global expansion of democracy, Fig. 4.1 Bond market larger than equities, Fig. 4.2 Yield spread, Greece ten-year bonds versus German ten-year bunds, Fig. 4.3 Selected yield spreads versus British consols, Fig. 4.4 Total US household debt as % of GDP, Fig. 4.5 G20 Advanced nations debt as % of GDP, Fig. 5.1 Dow Jones Industrial Average Fig. 5.2 Stock market capitalization as % of GDP, selected countries, Fig. 5.3 Number of US IPOs, Fig. 5.4 Ordinary investor performance versus Major Asset Classes, Fig. 5.5 S&P 500 Index and quantitative easing, Fig. 6.1 Usage frequency of derivative security in English Language Books, xiii

9 xiv LIST OF FIGURES Fig. 6.2 OTC versus exchange-traded derivatives, notional amount outstanding, Fig. 6.3 OTC derivatives market, notional amount outstanding, Fig. 6.4 Absolute value of monthly changes in Moody s Baa Corporate Bond Yields, Fig. 6.5 Gold price of Greenbacks, Fig. 6.6 Gold dollar price of Graybacks, Fig. 6.7 Troy ounces of gold per 100 US dollars, Fig. 6.8 Crude oil prices, Fig. 6.9 Barrels of crude oil per troy ounce of gold, Fig Payoff profile of a covered call write strategy versus purchase of underlying asset 213 Fig CDS market by notional value, Fig. 7.1 Ratio of FX trading volume to global trade, Fig. 7.2 Euro/USD rate versus Big Mac Index, Fig. 7.3 US dollar/chinese Yuan rate,

10 LIST OF TABLES Table 5.1 Stock indices around the world 127 Table 5.2 Ten largest daily % changes, Dow Jones Industrial Average, Table 5.3 US Fed response to bear markets, Table 7.1 Key currency pairs 231 Table 7.2 Big Mac PPP implied rates versus actual currency rates, July Table 7.3 US dollar and presidential elections, Table 7.4 US Dollar performance by presidential administration and party, xv