5 ms·

Elaborate por favor.

by lujim 11y ago

ZenoArrow 11y ago
Okay, let's set the scene. Let's start here: http://www.economicsinpictures.com/2011/09/size-of-financial-markets.html http://www.economicsinpictures.com/2011/09/size-of-financial... The image on that page is striking, but this is the key sentence: "Shares and bonds are about the same value of world GDP, but derivatives trading and foreign currency transactions are ten and fifteen times bigger than world gdp.". Derivatives are a broad field, but can be summarised as bets based on whether the value of something rises or falls (similar statements can be made about foreign currency markets). This money being made on derivative markets only changes the wealth of those making the trades, so unless a productive company is making the trades they are purely unproductive. In effect, it's gambling. In addition, money only 'performs work' at the point of exchange, which is why it's important to measure transactions rather than available currency. The vast majority of money movement exists outside the productive economy. Even without touching the productive economy directly, these trades can have adverse effects on the productive economy (destabilisation being the most obvious example, e.g. financial crisis of 2007-08). Any questions at this point?
- lujim 11y ago
  The "any questions at this point" comment seems a bit snippy and unnecessary, I was just trying to figure out what you were talking about... but no biggy here goes. So financial derivatives? Futures, options, shorting etc? Derivatives can play a very important role in the financial system. They can also be abused. Futures allow farmers (or airlines, or anyone else dependent on commodity prices) to hedge the chances of a bad harvest (or increased fuel prices) by locking in rates early. It's a form of insurance. Options, (let's go with calls and puts) were initially seen as purely speculative, but combined with an actual position in the underlying security allow someone to make investments while minimizing their overall risk. Again they act as insurance by people who know how to use them. Morons can make naked calls or puts but the generally lose their shirt. Shorting stocks plays a very important role in the financial world. Investors that short a company are one of the few entities that have a genuine interest in uncovering the dirt in a company. Regulators, share holders, etc may want to believe that a company like Enron is really doing well, but short sellers have a burning interest in combing through every line of their financial statement. While CMO's got a bad name in 2008 they are still used today as a relatively high yield alternative to US Treasuries and other fixed income investments since the Fed has decided to keep interest rates near zero for the last 6 years. CDO's also got a bad rap in 2008, but when used correctly they allow the transfer of risk from one party to another. Kind of like a cosigner on a loan. (gross over simplification, but good enough). If you're AIG and you don't actually have the money to backup all the CDO's your writing, then trouble can ensue. Interest Rate swaps are probably what jacked up your dollar number in that article. They are the vast majority of derivative investments, but they allow companies with variable rate loans to hedge agains the risk of a rate hike, by swapping with a company that has higher, but fixed rate obligations. Those can be a very big win for both parties. Financial derivatives get a bad rap because they sound scary and most people don't know what they are. They do however play a massively important role in managing risk.
  - ZenoArrow 11y ago
    > "The "any questions at this point" comment seems a bit snippy and unnecessary, I was just trying to figure out what you were talking about... but no biggy here goes." Sorry if it came across like that, I did wonder if that's how it would be interpreted, but I wanted to make it clear that I was pausing for feedback. Thanks for not holding it against me, let's continue. > "Financial derivatives get a bad rap because they sound scary and most people don't know what they are. They do however play a massively important role in managing risk." I understand derivatives in general offer an insurance policy against uncertainty in financial markets (thanks for the explanations of the different types, a couple were new to me). However, one could argue that insurance isn't a productive use of money, especially if the investment being insured against isn't part of the productive economy. What are your thoughts on this?
    - lujim 11y ago
      First of all I mistyped. When I said CDO i mean CDS (credit default swap). Yes I think insurance and other risk management tools are a very productive use of money. The joint stock company allowed the English and Dutch East India companies to take risks that no individual would be able to take alone. Now if insurance allows someone who decides to build an ocean front home on the Gulf Coast where three other houses have already floated away then its not very productive.
      - ZenoArrow 11y ago
        > "Now if insurance allows someone who decides to build an ocean front home on the Gulf Coast where three other houses have already floated away then its not very productive." Okay, so it is possible for insurance to be used for non-productive means. Would this extend to anything that wasn't a productive investment? For example, if I buy a house, and I insure that house, is the money I spend on insurance being productive? Let's also extend this to at another example, the government bond market, which as I'm sure you're aware controls how much new money a government can create. If you take safeguards against hyperinflation, is there any reason you would want to keep the current government bond market (bearing in mind that the bonds come with a debt burden for the government)?

Elaborate por favor.

by lujim 11y ago

Elaborate por favor.

Okay, let's set the scene. Let's start here: http://www.economicsinpictures.com/2011/09/size-of-financial-markets.html http://www.economicsinpictures.com/2011/09/size-of-financial... The image on that page is striking, but this is the key sentence: "Shares and bonds are about the same value of world GDP, but derivatives trading and foreign currency transactions are ten and fifteen times bigger than world gdp.". Derivatives are a broad field, but can be summarised as bets based on whether the value of something rises or falls (similar statements can be made about foreign currency markets). This money being made on derivative markets only changes the wealth of those making the trades, so unless a productive company is making the trades they are purely unproductive. In effect, it's gambling. In addition, money only 'performs work' at the point of exchange, which is why it's important to measure transactions rather than available currency. The vast majority of money movement exists outside the productive economy. Even without touching the productive economy directly, these trades can have adverse effects on the productive economy (destabilisation being the most obvious example, e.g. financial crisis of 2007-08). Any questions at this point?

lujim 11y ago
The "any questions at this point" comment seems a bit snippy and unnecessary, I was just trying to figure out what you were talking about... but no biggy here goes. So financial derivatives? Futures, options, shorting etc? Derivatives can play a very important role in the financial system. They can also be abused. Futures allow farmers (or airlines, or anyone else dependent on commodity prices) to hedge the chances of a bad harvest (or increased fuel prices) by locking in rates early. It's a form of insurance. Options, (let's go with calls and puts) were initially seen as purely speculative, but combined with an actual position in the underlying security allow someone to make investments while minimizing their overall risk. Again they act as insurance by people who know how to use them. Morons can make naked calls or puts but the generally lose their shirt. Shorting stocks plays a very important role in the financial world. Investors that short a company are one of the few entities that have a genuine interest in uncovering the dirt in a company. Regulators, share holders, etc may want to believe that a company like Enron is really doing well, but short sellers have a burning interest in combing through every line of their financial statement. While CMO's got a bad name in 2008 they are still used today as a relatively high yield alternative to US Treasuries and other fixed income investments since the Fed has decided to keep interest rates near zero for the last 6 years. CDO's also got a bad rap in 2008, but when used correctly they allow the transfer of risk from one party to another. Kind of like a cosigner on a loan. (gross over simplification, but good enough). If you're AIG and you don't actually have the money to backup all the CDO's your writing, then trouble can ensue. Interest Rate swaps are probably what jacked up your dollar number in that article. They are the vast majority of derivative investments, but they allow companies with variable rate loans to hedge agains the risk of a rate hike, by swapping with a company that has higher, but fixed rate obligations. Those can be a very big win for both parties. Financial derivatives get a bad rap because they sound scary and most people don't know what they are. They do however play a massively important role in managing risk.
- ZenoArrow 11y ago
  > "The "any questions at this point" comment seems a bit snippy and unnecessary, I was just trying to figure out what you were talking about... but no biggy here goes." Sorry if it came across like that, I did wonder if that's how it would be interpreted, but I wanted to make it clear that I was pausing for feedback. Thanks for not holding it against me, let's continue. > "Financial derivatives get a bad rap because they sound scary and most people don't know what they are. They do however play a massively important role in managing risk." I understand derivatives in general offer an insurance policy against uncertainty in financial markets (thanks for the explanations of the different types, a couple were new to me). However, one could argue that insurance isn't a productive use of money, especially if the investment being insured against isn't part of the productive economy. What are your thoughts on this?
  - lujim 11y ago
    First of all I mistyped. When I said CDO i mean CDS (credit default swap). Yes I think insurance and other risk management tools are a very productive use of money. The joint stock company allowed the English and Dutch East India companies to take risks that no individual would be able to take alone. Now if insurance allows someone who decides to build an ocean front home on the Gulf Coast where three other houses have already floated away then its not very productive.
    - ZenoArrow 11y ago
      > "Now if insurance allows someone who decides to build an ocean front home on the Gulf Coast where three other houses have already floated away then its not very productive." Okay, so it is possible for insurance to be used for non-productive means. Would this extend to anything that wasn't a productive investment? For example, if I buy a house, and I insure that house, is the money I spend on insurance being productive? Let's also extend this to at another example, the government bond market, which as I'm sure you're aware controls how much new money a government can create. If you take safeguards against hyperinflation, is there any reason you would want to keep the current government bond market (bearing in mind that the bonds come with a debt burden for the government)?