The Financial Market
Investors spend billions of dollars from the Federal Reserve and the United States Treasury to move currency one way or another. The goal is to keep the dollar from becoming too weak or too strong.
Investors change the value of currency in relations to other countries, by either buying or selling currency from money traders around the world.
In hopes of greater returns millions of American investors take their savings from government insured banks, and are buying mutual funds. These investors are making a great deal of money because of the global market in capital.
The exchange rate is the price of one currency in terms of either gold or another currency.
Finance capital is the money that has been invested in bonds, loans or stock shares.
The exchange of money enables investors to mass great wealth, and it is mass wealth that is the core of the financial market and the capitalist system.
Fixed exchange rates refer to values established by governments, while floating exchange rates are those that fluctuate freely as the foreign exchange market fluctuates.
If the dollar becomes too weak this will cause inflation, and if the dollar becomes too strong it will cause exporters to compete in other nations.
Investors will increase the value of currency by buying more and more currency. If in investors are interested in lowering the value of currency they will sell currency to traders around the world.
The money that is being invested has been accumulated from previous investments. Savings from profits that have been made by investors or wages that have been accumulated in the past generates investment capital.
Currency trading can be very risky. Currency is controlled by interest rates and is susceptible to the fluctuation of interest rates.
If interest rates rise then currency prices drop, and if interest rated lower the bond prices will rise.
The finance market has become so large because it grew faster than any other market. The global market has grown in the past twenty-five years because governments have removed control on financial capital.
Finance investments have dominated the markets so greatly that by 1992 assets from the advanced nations of the Organization for Economic Cooperation and Development totaled thirty-five trillion dollars, which was double the economic output in those nations.
The Organization for Economic Cooperation predicted that total financial stock will reach fifty-three trillion by the year 2000, which is triple, the economic output of these nations.
The fastest growth experienced by the financial markets has been government debt.
Financial markets are lending money to governments in nearly every major economy, which in turn has deepened government debt.
In OECD countries the stock of government debt has risen nine percent a year between 1980 and 1992. This growth is three times the amount of OECD countries economic output.
Because tax revenue has not met the supply of government spending, causing slow growth within the economy, many governments continue to borrow from the financial market.
Even though national currencies are erratic and undependable, national currencies have become a commodity in global trade. The wealthy continue to trade currencies because that can be very profitable for smart traders.
Just as commodities traders would avoid corn or pork bellies if demand becomes weak, currency traders react to the strength or weakness of a currency.
It is a matter of supply and demand. Nations who want to invest in other nations need the currency to invest. The more currency investors demand, the more they will pay for other nations currencies.
Assets in financial markets whether corporate stocks or government bonds are simply a piece of paper that promises income from future economic growth.
Financial markets re-price the value of these assets, stocks, bonds etc., every day as investors use the financial market to accumulate wealth.
The financial market and major economies: Mexico, United States, and Japan.
The global market and the buying and selling of currency can have devastating consequences on global commerce and national economies.
Fluctuation and instability in financial markets, as well as the reduction and rising value of currency can be seen in many developing and established nations; across the globe the financial market has caused turmoil in many nations.
In 1982, Mexico and other developing nations began defaulting on their debts to foreign banks, yet investors were still willing to finance developing countries ten years later.
In 1995, Mexicoís failed economy caused a worldwide panic in the financial market. Investors were selling their money and getting out of newly emerging markets.
The United States
In 1987, the American stock market crashed. The market had experienced a peak of 2,700 in the Dow-Jones industrial average to a low of 1,700, crashing the American market and many European exchanges.
The Dow Jones returned to record levels of 4,000 in 1995, and 6,000 in1996. In the eyes of the investors, value of American companies and American currency had more than tripled in the past decade.
In the 1980ís the United States government began spending billions to pay the debts of failed investment that had been made in the savings and loan industry. Even after these losses, the United States continued spending billions more in an attempt to help major commercial banks recover from the same failures.
In 1994 the worldwide sale of bonds, the paper that is used by governments to pay debts, caused a global crash in bond prices and an increase of long-term interest rates.
In the 1970ís Paul Volcker, head of the Federal Reserve, made an attempt to solve the problem of price inflation in the United States. The Federal Reserve increased American interest rates for a period of more than five years.
Volcker was successful in his efforts; the dollar value had increased and foreign investors began buying more and more US currency. Within a few years, the dollar rose by fifty percent against other major currencies.
Because the value of the United States dollar was so high, in the 1980ís America manufactures found it difficult to compete in the foreign market; prices were too high. Manufacturers in the United States were forced to relocate production of goods in an area where currency was not as strong.
By the mid 1980ís, many Americans found themselves buying cheaper foreign products and saving money. Consumers had benefited form a high dollar because it had made foreign goods less expensive.
In the 1980ís the trade deficit in the United States also increased. Non-US goods were cheaper than American goods in world markets so fewer American goods were bought.
The United States started experiencing slower economic growth, which in turn, allowed Japanese firms to gain the advantage in the global market.
The United States and Japan governments, in attempts to correct the imbalance in their currencies, agreed upon the Plaza Accord. This agreement attempted to correct the imbalance in the two nations currencies.
In the mid-1980ís, the Plaza Accord allowed two major central banks, the Federal Reserve and the Bank of Japan, to worked together and drive down the dollar and restore economic growth in the United States, and at the same time increase the value of the yen and restore economic growth in Japan.
Since 1971, the dollar has undergone several fluctuations. The dollars value is sure to decline much further if the United States does nothing to correct its trade deficits and mounting foreign debt.
In the 1980ís, investor borrowing and lending in Japan had valued Japanese real estate as worth more than that of all North America. The Japanese economy had generated wealth.
In 1989, the Japanese economy crashed, devaluating the price of the Yen, and creating great economic disruption.
Japan experienced falling prices and failing debt on a large scale. Because of Japanís economic crisis, world banks had to contend with bad loans that were estimated at $400 billion to $500 billion.
By late 1985, after the Plaza Accord agreement had been reached, the United States dollar began to decline and the Japanese yen began to increase in value.
Japanese manufacturers began to pass on production to Taiwan, Singapore and other lower wage Asian economies in an attempt to escape the price problem caused by the strengthening yen, but a few years later manufacturers found themselves moving factories to Thailand or Indonesia, again because of the high price of the Yen.
In an attempt to keep the yen from appreciating further, the Bank of Japan began to lower interests rates, which in turn created an increased in its supply of money.
Japan, in an attempt to lower the value of the yen, began lending more money to the United States and began buying Treasury bonds and other assets. Japan was making attempts to help the United States economy recover from the lower rate of the dollar. This lending and buying further increased the Japanese economy, by increasing the value of the Yen.
Japanese investors lost hundreds of billions by investing in United States bonds because the dollar kept depreciating in the exchange value. Japanese wealth that had been invested in the United States began to reduce in size at a rapid rate.
United States bonds that had been bought when the dollar was worth 200 yen had decreased in value, and were only worth 140 yen. Japanese investors also had to contend with a collapsing stock market and billions in failed real-estate debt.
In the 1990ís the Bank of Japan began to tighten financial policy and Japan began a long-running recession.
Due to losses in the global financial market Japanese investors stopped practically all lending and investments to the United States.
Keeping the capital within the Japanese economy only increased the value of the yen further, and the stronger yen began another cycle of pricing pressures on Japanese producers.
The Japanese had built their economic strength on export manufacturing and were faced with a problem; the stronger the yen became the stronger the threat that Japanese industries would be whipped out.
The United States Treasury and the Bank of Japan, were making attempts to ease the Japanese crisis. The two countries settled its trade dispute over auto parts, and Japanese institutes began buying more United States bonds.
The Federal Reserve and the Bank of Japan began pushing up the currency markets to raise the price of the dollar and reduce the power of the yen.
Japan began to cut interest rates in an attempt to stimulate the economy, and the Federal Reserve agreed to supply the Japanese banking system if the crisis worsened.
The Dynamics of the Global Market.
Investors make their decisions about currency based on economic indicators, but largely it is how confident the investor thinks the world feels about investing in and trading with other nations.
Greed has been ever present in the global financial markets, but greed is not the only reason the financial market has become so powerful across the globe.
Beyond jobs and prices, the value of dollar and itís meaning has a lot to do with how much Americans will enjoy their future. Millions of middle-class Americans have begun to invest billions of dollars in the financial markets around the world, many of these investors are unaware of the risks involved in financial markets.
Americans are investing in mutual funds. These mutual funds consist of bonds and corporate stocks that are traded around the world.
One problem with mutual funds is that they are not federally insured; if these funds are lost then there is no federal government to help re-coop the losses felt by many American citizens.
Many Americans either ignore or misunderstand the dollarís movement, because currency markets are incredibly powerful and terribly complex, and most importantly, almost impossible to predict.
Rising returns on investments have made the wealthier a great deal of money. Small investors may see some return on their investments but the wealth of the financial market is not shared equally.
The Imbalance Created by Currency Trading.
Financial markets and currency trading have begun to increase at a very rapid rate. The growth in financial markets has begun to affect governments and citizens in the global market.
Governments as well as Central Banks are incapable of slowing the force that the market creates when traders around the world invest their money.
The global market has experienced a power shift from governments to financial markets. Currency values move within the global market and react to economic situations.
In the past this movement has set into motion a wave of economic outcomes, which have been blamed on individual investors and government, not the unstable financial market where individual nations have defaulted on loans or high inflations rates caused interest rates to fluctuate.
As imbalance is building across the global market, many wealthier investors do not see that there is a problem within the market.
Larger investors have who have experienced a rising return on their investments and accumulated a great deal of wealth refuse to believe that financial markets are not a good investment.
Governments, and the Financial Market
Government deregulation in financial markets has created economic instability and also created currencies that have become unreliable.
The Brentton Woods agreement, established in 1944, called for United States currency to be set to a gold standard. Brentton Woods provided a system that would advance would-wide growth.
From the period between 1944 until the 1970ís the United States was an economic leader, however by 1971 European and Japanese economies had caught up and were ready to establish power in the global market.
An international money-trading system, created in 1971 by President Richard Nixon, created deregulation in financial markets and lessened the exchange ratio of the dollar with other currencies; the dollar had ceased to be convertible into gold. Investors were able to invest in financial markets seeking the highest return possible, without restrictions, ending the Bretton Woods era.
The ending of the Bretton Woods was the beginning of the overvalued dollar in the United States. Currencies were now set at a floating rate rather then fixed exchange rates. Since currencies were no longer linked to each other fluctuations in the financial markets were common. These fluctuations were the cause in trade imbalances in the global market.
Measure were needed to regain control of financial markets. Paul Volckec, former chairman of the Federal Reserve, one of forty-seven international financial experts, severed on the Bretton Woods Commission. This commission understood that exchange rates were damaging societies and nations.
In 1994, the Bretton Woods Commission reported that since the 1970ís, the impact of unregulated currency markets had affected major industrial industries by cutting long-term growth in half, from about five percent a year to about 2.5 percent a year.
The Bretton Woods Commission admitted that there were many factors that had contributed to the decline of long-term growth in many countries, but insisted that low-growth rates are an international problem, and the loss of exchange rate regulation has played a part.
As reported by the Bretton Woods Commission, the era of liberal finance and expanding trade has led to other disappointing results, mostly in the form of high unemployment rates in wealthier nations. Unemployment in wealthier nations had risen from two to three percent on an average in previous years, but rates were climbing to between five to six percent. OECD economies had an averaged of eight percent unemployment in 1994.
Capital investments from wealthier nations declined in the 1990ís. Peaking at twenty-four percent of the gross domestic product in 1973 and fell below twenty percent in following years.
Investment is needed to replace capital. Because of deregulation, investors were no longer obligated to reinvest capital into national economies and stimulate economic growth.
When capital is not reinvested, governments in wealthier societies found their economies growing slower. Governments are increasing accumulating larger budget deficits, which in turn, causes governments to begin borrowing more money to finance their debt.
The Bretton Woods commission urged governments to consider a new international money-trading system, before the current system caused any more destruction.
Investors of the free markets continue to insist that governments should give up their authority in the financial market and let privates markets direct the global market, but the reality of the past twenty-five years of instability and crisis insists governments somehow have to intervene.
Resolutions in the on going battle over financial markets can be accomplished if nation-states reclaim power and restore political controls over capital finance. Governments can reclaim their nation by simply taxing citizens instead of using the global market to finance their debt, but politicians can suffer the consequences when it is time fore re-election.
Foreign competition is the most powerful force driving financial and economic reforms, and central banks and governments lacked the resources to push for reforms.
In 1992, investors had begun to successfully force British and Italian governments to devalue their currencies, and in 1993 the same strategy was used to devaluate French and other currencies. Foreign investors devastated Europeís currency-exchange system, a system that was the foundation for European economic union.
When governments are experiencing huge deficits and inflation, investments in currency will fall. Higher interest rates cause currency values to increase. It is harder to compete in nations whose currency values are too high, because this makes manufacturing costs increase.
Developing nations are being punished by imposing harsh restrictions on how these nations may spend money, which can force countries to cut back on education and health programs.
When devaluation of currency occurs, governments and central banks are forced by the markets to make huge and sudden adjustments, at great cost.
Governments find themselves being controlled by the financial market. Major governments have surrendered claims on capital, by retracting their controls on inflowing and outflowing capital, as national markets are opened to foreign firms and foreign money.
It is the market itself that has caused governments to be mediators between bad investments and financial stability.
Governments are forced to intervene when nations experience devastating losses from bad investments.
Efforts have been made to manage the flow of currency, but ultimately policies are driven by what is happening in each individual nation.
Governments find themselves competing with their own economies when currency becomes in such high demand.
Greider, William, One World, Ready or Not: The Manic Logic of Global Capitalism. Simon and Schuster: New York, 1997.