Kids on Wall Street

The world of international finance is a murky, mysterious one for most Canadians and Americans who punch a clock in a factory or put in long hours at an office building. Most probably believe that the global economy is dominated by some sort of merchandise trade based on manufacturing, construction, agriculture, resource extraction and service and supply businesses. That may have been the case in the post-war boom, but not now. In 1997, for example, financial transactions on world markets were 75 times as large as merchandise trade.

Should we worry? Probably. John Maynard Keynes first warned against the danger of finance dominating the real economy when financial exchanges were about twice as large as merchandise trade. And that was long before high-technology transformed world financial markets into a cyber-world of cyber-money managed by cyber-kids.

Finance and high-technology are now the cornerstones of today’s highly touted new economy. What’s more, the introduction of electronic exchange and digital information has propelled world financial markets to dizzying, almost incomprehensible levels.

Experts now say that close to US$1.3 trillion worth of currencies change hands on world markets each and every day. That’s only part of the “hot-money” picture, as foreign-exchange trading represents a mere 25% of the financial economy. Add in other financial instruments — stocks, bonds, commodity futures, derivatives, etc. — and daily transactions climb to US$4 trillion. Banking experts have estimated that the pool of cyber-money transmitted instantaneously around the world amounts to a whopping US$13 trillion.

Global trade in money and other financial instruments has grown at a mind-boggling pace to mind-boggling proportions in a largely unregulated environment. Financial instruments are more complicated and convoluted than ever, and new ones are being created through the “monetization” of a variety of hard assets.

Gold, long a cornerstone of financial markets, has been deemed a relic in this fast-paced cyber-world. Most other commodities are viewed as equally uninteresting.

It would be reassuring, we suppose, if today’s financial markets were bastions of fiscal prudence, sound management and well-thought-out financial strategies. But conservative blue-chip, investment-grade thinkers have lost ground (and big commissions) to the young and the aggressive. Today’s financial markets are highly speculative, driven by fear and greed, ignorance and testosterone.

It takes nerves of steel to play the financial markets these days; hence the burgeoning number of kids in suspenders running the show. These cyber-kids have been blamed — rightly or wrongly — for precipitating more than 10 significant global crises since the mid-1970s.

Several Asian governments have condemned currency speculators and the damage they have done to national economies. Prime Minister Jean Chretien has made negative remarks about “28-year-old money-traders in red suspenders.” And in the mining world, Freeport Chairman James Moffett has harshly criticized “kids on Wall Street” for wreaking financial havoc in countries they probably don’t know how to spell. Even American billionaire George Soros has criticized the recklessness of the very financial markets that made him fabulously wealthy.

We have nothing against people making money on the world’s financial market. And if reckless kids are in charge of billions of dollars, it’s the parents’ fault for allowing it. Kids will be kids. It’s the folks with grey hair who must remember that where there is potential for high reward, there is corresponding high risk. Maybe they do. Maybe there is a master plan at work here and not just chaos theory, or the greater fool theory.

The point of this missive is that the real economy — and, by extension, real products and commodities — should not be overlooked or dismissed as a relic of bygone times. They ought to be the cornerstone of world financial markets, not an afterthought. Fundamentals matter in the real world. And the global economy must have a real-world foundation, or the entire superstructure of cyber-finance could collapse like a giant pyramid scheme.

The young folks pushing buttons on computer screens have had a great run in the past decade, shorting gold and currencies of developing nations and monetizing everything in sight in order to pull in billions for their bosses. Most probably believe the bull market is far from over.

Maybe they’re right. Maybe it really is different this time. With all that testosterone, maybe the market really will stay up forever.