The current financial market is characterized by four fundamental elements that characterize it:
1- Universality
2- Permanence
3- Immateriality
4- Immediacy
With the development of technologies in the field of telecommunications, today all the main stock markets are interconnected with each other, rapidly affecting all of them any variation that occurs in one of their members.
The enormous revolution in information technology and communication leads to the rapid transmission of data from different parts of the planet, operating the different exchanges interlaced with each other, twenty-four hours a day without stopping.
In this globalized world there are those who are considered the "owners of the market" who obtain large profits on the price of securities or money. These "market owners" just by making a wrong decision or action make all the stock markets in the world reel.
The power of the states against these financial giants has been delimited. The different financial crises in the 1990s have shown this.
Former French minister Raymond Barre, defender of economic liberalism, affirms that "the international financial system does not have its own institutional means to face the challenges of globalization and the general opening of markets."
Burros Ghali, former secretary general of the United Nations, also found that “the reality of world power is totally beyond the control of the State. Globalization implies the emergence of new powers that transcend static structures.
The mass media have become powerful instruments, conquering mass audiences on a global scale, as can be seen in the United States.
Those who buy and sell shares or bonds on the stock market generally acquire them to later sell them on the same exchange at a higher price and thus obtain a profit.
Unlike real capital invested in the different branches of the economy, fictitious capital has no value in itself and therefore does not constitute real wealth nor does it play any role in the capitalist reproduction process. This explains why when share prices fall on the stock markets, social wealth does not decrease in the same proportion, but the holders of the devalued shares or obligations lose.
With the rises and falls in the prices of shares and bonds, those who speculate enrich themselves, not bringing real profit to society, which reveals the parasitic nature of fictitious capital.
We must also bear in mind that the stock exchanges are true economic thermometers: if the economy goes well, prices rise; when a company goes bad or has problems, the values go down, because their owners want to sell them at all costs before they fall further.
In recent years, financial systems have been subjected to far-reaching institutional changes and innovations have appeared in money and capital markets that have had a decisive influence on their operation. The disengagement of the international monetary system from gold, the development of unregulated offshore credit and securities markets, the trading of derivative products, etc., have notably increased the liquidity of financial markets, forcing central banks to vary their strategies for achieving the objectives of monetary policy and even modifying the scale of priorities of these objectives.
Liberalization and financial innovations have had three important effects:
1- The risks of financial systems have increased.
2- They have accentuated the dependence of countries with weak currencies with respect to the hegemonic countries in the international monetary system.
3- It has rendered obsolete some assumptions of the theoretical paradigms on which the traditional schemes of monetary policy were based.
The interdependence of national economies through globalization has been affected by international financial liberalization and the different international shocks that different countries have suffered are caused precisely by disorderly speculation in the stock markets.
In the 1990s, the financial crises that stood out the most were:
- The Japanese crisis from 1990 The Mexican crisis "The Tequila effect" in 1995 The Asian crisis "Dragon Effect" in 1997 The Russian crisis "Vodka Effect" in 1998 The Brazilian crisis "Zamba Effect" in 1999
Financial instability in the 1990s took on great relevance due to its harmful effects on these economies and its global reach. The world economy has encouraged a movement of capital accumulation. Even the North American economy has been questioned in its cycle of economic growth that it was going through. The effects that flow from Walll Street influence the world arena.
A very significant example of the negative impact that the world's economic history has had is the financial crisis of 1929-1933. This crisis starkly reflected the profound contradictions of the capitalist regime. The insufficiency of the North American economy was alarming.
In the four years that the crisis lasted, 5,761 banks failed. Exports fell notably from $ 5,157 million in 1929 to only $ 1,647 million in 1933. The crisis manifested itself in industry, agriculture, commerce, and banking, as all sectors were affected..
The crisis spread worldwide and as the country's economic foundations were not solid, the Wall Street crash produced in the United States a period of economic stagnation that is known as the Great Depression. The first effect of the crash was the bankruptcy of numerous banks, resulting in the weakness of the financial system.
Another example of a long-term financial crisis is the case of Japan. In 1985 the Japanese economy experienced a momentary recession due to the dramatic adjustment in the price of the dollar and the acceleration of the rise in the yen that occurred as a result of the Plaza Accord. The deflationary impact of this rise in the yen had very serious effects on the Japanese economy.
The Government and the Bank of Japan began to take fiscal and monetary measures with a view to enhancing the economic recovery and reducing the current account surplus. The most significant points in this series of measures included the reduction of the official discount rate to 2.5%, an additional allocation of 6 million million yen for public works and reductions in income tax for an approximate value of 1 million of millions of yen.
In the second half of the 1980s, and especially from the end of 1987 to 1989, equity and land prices inflated rapidly, as if it were a kind of gigantic bubble in the Japanese economy. This rise in prices resulted in speculation in the stock and real estate markets.
This speculation is due to a large extent to the interest rate, since low interests mean, in turn, that asset prices are high. Both cases are related: a fall in long-term interest rates increases the predictable earnings of the assets.
Another important factor for the formation of the bubble was an excess of credits. This was what actually happened in the late 1980s. Between 1987 and 1989, the amount of money in circulation increased by an average of 10.8% per year and exceeded nominal gross national product (GNP) growth by an average of 4, 5 points.
Excessive liquidity growth serves to transact assets or in other words, to inflate the speculative bubble. Between 1985 and 1990, the financial deregulation that accompanied the total monetary issue, which grew by an average of 10%, caused, from the second half of 1988, an excessive speculative boom that led to the purchase of land, stocks, paintings and luxury items.
In the spring of 1987 when Alan Greenspan succeeded Paul Volcker at the Federal Reserve's prudence, the discount rate rose one point. The Bank of Japan looked set to follow suit in October.
But a stroke of bad luck in October 1987 forced them to activate the credit policy motivated by the momentous "Black Monday" on October 19, when the US stock market crash dragged those of Tokyo, Singapore, London and Frankfurt, among others. To overcome the crisis, the US authorities quickly injected money into the system, lowered the interest rate and asked the richest countries to follow their example in order to help the dollar become consistent.
Since the early 1990s, the bubble economy began to collapse with the accelerated collapse of the share price. Thus, adding to the financial restriction, the outbreak of the Gulf War and the decline in the economy, the prices of land, works of art and precious metals fell sharply.
An important fact of the most recent disastrous effects of financial speculation on the world economy is the one that occurred on Tuesday, February 28, 2007, when there was a general collapse in the main world stock markets, which recalled the turbulent days of the second mid-nineties.
Total losses on world stock markets in four days are estimated to be approximately $ 1.5 trillion. The Chinese stock market fell sharply, dropping the Shanghai Composite Index by 9%, mainly caused by accelerated share sales by some investors.
It is proven that the large volume and speed of operations with the expansion of markets in the last decade of the 20th century and the beginning of the 21st also has to do with the disintegration of the socialist camp in Eastern Europe and the universalization of structural adjustment policies, economic opening and liberalization of Latin America, Asia, Africa and Eastern Europe. Under this policy, markets were deregulated, local economies were opened, and investments were assured worldwide. In this answer, international financial organizations acted on governments.
Latin America has been subjected to these policies through external indebtedness, accelerating in the 1990s. The international flow of investment to this region has been very important in these years. Investments and indebtedness have grown, concentrating wealth and spreading poverty and inequality.
In 1982 the debt crisis broke out, private banks immediately refused to grant new loans, demanding that the old ones be repaid. On the other hand, the IMF and the main industrialized capitalist countries grant new loans to allow private banks to recover their loans and prevent a succession of bank failures.
From that moment on, the IMF, backed by the World Bank, imposes structural adjustment programs. Indebted countries are threatened with no more loans from the IMF and northern governments if they refuse to carry out structural adjustment.
These structural adjustments consist of two main types of measures, the first are: currency devaluation and a rise in interest rates in the country under consideration, and the second are structural reforms such as privatizations, tax reform, etc.
As the money obtained by the public powers in the domestic financial market is very expensive and is not enough to pay the previous debts, governments and private companies proceed to issue securities in international markets. This is less expensive as interest rates in developed countries are currently lower than in countries such as Brazil, Mexico and Argentina. The downside is that they become more dependent on the outside. The large Latin American states issue debt securities many times a year. The accumulation of money made after an issue essentially serves to pay the holders of previously issued securities. The height of dependence on the United States is that some Latin American countries, starting with Mexico,they must buy United States Treasury bonds as collateral for their own loans in international markets.
In recent decades, speculation and the increase in capital volatility have contributed to increasing uncertainty and risk in the international financial system, contributing to the external vulnerability of less developed economies. Among the fundamental factors that have given rise to this fact are the fluctuation of exchange rates, the liberalization of financial systems and of capital movements. All of them channeled through the development of information technologies that facilitate capital movements.
These new characteristics of the financial market have led to a succession of financial crises generating growing concern in governments and financial organizations.
Due to this, some regulation and control instruments have been put in place, but these are not enough. The financial system evolves at a speed that cannot be efficiently controlled.
An important element in financial speculation is banks as risk takers, despite their more serious image and the regulations to which they are subject, they also actively participate in risky operations. Before the Asian crisis, more than 55% of extreme bank loans were short-term, with maturities of less than one year. Those proportions are higher in emerging markets.
Banks are more active in speculation and have riskier lending strategies. This has been motivated mainly by the increase in inflation in the industrial countries of the 1970s that reduced the returns provided by bank deposits.
The response of the banks was to make more profitable and risky loans seeking benefits in other operations. In the 1990s, Japanese banks were the ones that provided most of the financing to the Asian countries that went into crisis in 1997.
A part of the funds went to the real estate sector and speculative sectors where economic bubbles similar to those of Japan in the late eighties were created.
In recent times, speculators have exaggeratedly used the country's financial markets for short-term profits. The crisis in Thailand was due to speculative bubbles caused by large inflows of funds from the private sector to sectors such as real estate.
The increased risk in banking operations is recognized by the IMF:
“Supervisors (of financial systems) began to monitor large banks more closely and efforts to update international prudential requirements accelerated. The move towards closer monitoring of bank activities and towards greater openness of information seems to reflect the recognition that if commercial banks increased their reliance on profits from transactions (including property transactions) and on leverage (including derivatives and trade credits) may have increased systemic risks. In the United States the change also appears to have been motivated by the changing nature of the industry due to the numerous mergers between the major banks. ”
According to Alan Grenspan "… interbank loans are the Achilles heel of the international financial system."
The current international financial scenario has caused profound transformations in the world economy that explain the growing instability and uncertainty that characterize the monetary and financial sphere, questioning the very existence of an international monetary system. As a result of all these transformations, the financial internationalization process was consolidated, characterized by:
- Strong deregulation and financial liberalization Volatility and instability of economies Considerable development and connection of foreign exchange and capital markets Change in the pattern of financing in favor of the latest securities Unprecedented increase in speculative activity at the international level Remarkable and sustained boom in financial innovation focused on new products and processes Unquestionable dominance of large commercial banks, transnational companies and institutional investors in international financial transactions Concentration of financial flows in highly industrialized countries Accelerated expansion of Foreign Direct Investment Loss of monetary functions of the IMF Strong privatization process that destroys the productive bases of the States,through the devaluation of productive assets and their subsequent impact on foreign capital. Decrease in public spending, highlighting the rise in debt payments and services to the detriment of social spending.
We can summarize that in the mid-nineties, when globalization spread throughout the planet, the United States as the absolute owner of the international financial institutions and based on its immense political, military and technological strength, reached the most spectacular accumulation of wealth and power in history.
In the effects of neoliberal globalization, the speculative economy is further separated from the real one. The wealth concentrated in the financial oligarchy increases; unemployment grows; the gap between rich and poor widens; denationalization of states; privatization increases.
We were entering a new stage where economic operations were hardly related to world production and trade; Millions of millions of dollars in speculative operations, linked to currencies and other securities, took place every day in the US stock exchanges, the prices of shares soared, often without any relation to the profits and profits of the companies. Purely imaginary wealth was created, there were cases in which having invested a thousand dollars, its value increased 800 times in 8 years. It was like a huge balloon that was inflated. Such virtual riches were spent and squandered.
The trend of the financial economy in recent years are as follows:
a) Predominance of the dollar
b) Predominance of a non-dollar currency
c) Inter-monetary agreement "basket" of currencies
d) Mostly speculative financial flow
e) Open investments
National economic policies are invalid and are subject to the actions of private transnational finance capital.
The International Monetary System under these conditions has four characteristics:
1- It is private
2- Speculative
3- Unstable
4- Pro-American
The US dollar is still the most common reserve currency and the currency of choice for speculation that you can buy anywhere in the world. In 1975, the purchase and sale of foreign currencies for payments for the acquisition of goods or services represented 80% of the total foreign currencies traded. The remaining 20% was currency speculation that traditionally was a minority in currency trading.
Twenty years later the scene had radically changed. Already then, 97.5% of the total currency trading decides and dictates trends above and to the detriment of the real economy.
The big banks have been moving from their traditional functions of providing credit to become speculators with currencies.
The foreign exchange market has three main Financial Centers:
1- The one in London
2- New York
3- Frankfurt
This market is made up of representatives of banks, financial institutions and recognized companies of foreign exchange brokers.
Final Considerations:
The speculative processes that accelerate and sharpen the "bubble economy" show that no capitalist development model is exempt from the dangers of the fictitious capital movement that always promote the search for quick and easy profit, above the strategic and safe path of technological competence. In short, a country that produces more and better due to an increase in its productivity strengthens its currency in trend.
The monetary exchange rate makes the analysis of international competition more complex when inflation is taken into account. A country with high inflation loses competitiveness abroad unless it depresses its currency. Thanks to depreciation, they obtain less international currency, that is, less international value. Through inflation the capitalists obtain more absolute surplus value and through the depreciation of the national currency they can sell at competitive prices in the international market.
The deregulation of the markets, the reduction of the role of the State in the economy and the commercial and financial opening in the indebted countries has been part of the growth strategy of the adjustment programs agreed with the IMF, as a requirement for the structuring of the external debts and resumption of international banking loans.
In recent years, the world has been the victim of international financial crises, as speculative movements are capable of destabilizing the financial system in a single day, affecting the rest of the world's economies.
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