From Excessive Accumulation Derives Non-level Playing Fields

One billion is not just the product of 1000 and 1000. When trading financial instruments, because of the dual-posting principle explained in Chapter 4, making any transaction reciprocal to the number of holders and the resulting power on exchange ratios will be influenced in a non-linear manner. To illustrate, let's take an example. If a financial instrument is held in one hand in an amount of one million dollars, and the demand for exchange at 1000 dollars is held in 1000 hands, and both benefit from transparency as to such monetary conditions, there is no way that the holder of the monetary instruments wifi have power to influence the offer, since the 1000 holders will not act as a single holder but wifi, on the contrary, have differing exchange needs. Some may need more immediate money than others. This person may suffer the imposition of an unfavourable exchange ratio (compared with the reference), but the impact on them may be less significant than on the big holder because the impact is divided among many. The time aspect will appear. We are talking about human beings. To simplify, the single holder needs to eat every day with a cost of a hundred or several hundred if a team. The thousand holders will have a similar need, but multiplied by a thousand, that is to say 1000 × 1000 = 1,000,000. The figure will change the balance of forces in the price setting between parties, depending on limits that are different for each of them, and will operate differently in accordance with their cash liquidity, limited availability of product, minimum quantitative needs or production factors as a multiple but different for each of the parties; in an economy with overabundant supply, the bigger the buyer is the better they are positioned. As we know that transactions are the source of gains, the need to act will be more urgent for the thousand. If they know that they have no solution other than dealing with the single holder, they are submitted to a haircut. All conditions will interact, since we are not dealing with physics here but human processes with anticipation capabilities. The quantities of products and services will also interact with speed when we consider not only the actor but also the purpose of the exchange. Time will become a value depending on the need to buy or sell the considered object to the exchange, which is normally a constant. The price for the exchange is the adjustment factor. If you have a crop that cannot be stored, or if storing it entails a cost, you are led to consider time while the party holding the monetary reserves may try to play on the time factor if they can. What differentiates physical masses from monetary accumulations is again this link to human behaviour that is really determined by nature (the need to eat, or to have the cash to do so) and by socially accepted constraints, such as the need for a business to make profits.

Considering money accumulations is, in our opinion, key to understanding markets, price sampling and market oversight. Not only is this the approach that is needed for market surveillance, it is also the way to determine the appropriate levels of firewalls that are needed to guarantee the liquidity of markets at central monetary institutions. Basically, this is the reason why money cannot be left totally to free markets, if anyone thought it could, as if markets were perfect. While parliaments and courts can regulate by law and decisions the exchange of monetary exchangeable instruments, central banks, being independent, are required to stabilize financial markets and to engage in whatever is necessary to maintain the value of their respective currencies for exchanges, including the traditional fight against inflation. These central bank interventions took place during the 2007 crisis that was not predicted by economists, and sometimes add a new goal, such as the fight against unemployment. The interventions were carried out in a disorderly way, without knowing why and for what purpose, besides knowing that books and records are not reliable and that markets need liquidity to substitute for the lack of interbank refinancing – the money contraction effect of interbank refinancing, where tax and regulatory incentives to help public issuance subscriptions have reached their limit. Some of the policies conducted did not produce results, despite encouraging speeches lending them justification. There is an urgent need to understand the role of money accumulation and speed in a context of false recording on financial statements. This is the key for any regulations, since monetary accumulation into a mass will constitute the firewall against speculation. When disclosed, its amount, if appropriate, will operate as a buffer and deter attacks while its absence may generate them. The next question is how to determine the appropriate amounts.

< Prev   CONTENTS   Next >