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The Markets. The Markets. Who Are These "Markets" We Are So Beholden To?

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But in spite if their remoteness, the "markets", from comments like those of Hutton, start to assume something of a personality. This personality resembles more than anything that of the great Greek god of the Olympiad, Zeus: sometimes almightily powerful, sometimes tetchy, sometimes offended, judgmental, pathetic or vulnerable and of course sometimes just plain brutal. But, as for Zeus, we just have to accept and pay homage and try our best not to offend.

 

The use of the word "markets" is a way of referring to something we are not expected to understand or approach. But the real reason why the "markets" must remain cloaked in mystery is that the truth exposes a sickness that is intrinsic to the whole political/economic model we work under.

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It is a curious fact that reporting of the crisis focuses entirely on debt. There is private debt, public debt, debt everywhere you look. But is it hardly sophisticated economic theory to point out that where there is a debtor there is also a creditor. The closest we ever get to defining the creditors is by reference to these invisible "markets".

 

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Also an unstated, but really quite remarkable fact, is that, however big government debt may be, there is always someone or something out there that can buy this debt. That is not to say they always necessarily will, but in practice they do. It is just a question of the price.

 

The debtors' debts climb into the multiple trillions of dollars or euros and yet the money to finance this debt is always somehow there. Sometimes it might be other governments with surpluses that step in to offer credit (such as China) or from investments like pension funds but a good deal comes from private sources, i.e. private banks. Even when the source is nominally from individuals, as in the case of hedge funds, in reality only a small percentage is of the individuals' money which piggy-backs on "leveraged" finance provided by banks.

 

So the next question is: where do the banks get the money? How is it always there available? On the face of it, it is a remarkable fact that private banks have enough wealth to support countries in their borrowing, that is, private companies can have country-size balance sheets. It is, indeed, remarkable. But also very disturbing that they should have such power.

 

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What is even more worrying is the way in which this money comes into existence. Investment analysts, David Roche and Bob McKee, wrote an important book called New Monetarism in which they explain how the current financial system has created a monster amount of money off the back of the so-called "derivatives". They explain that money created in this way dwarfs into insignificance money created by orthodox methods long used by banks and governments.

 

Derivatives are essentially bets on the movements of any number of economic indicators and contracts: currencies, loans, shares and of course derivatives themselves. How do bets create money?

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