This paper contributes to the debate on the role of financial derivatives for capitalism. It responds to Bryan and Rafferty’s defence of their analysis and their critique of my own. The paper argues that their analysis confuses what a financial derivative does, and mixes together different kinds of derivative – and non-derivative – that play very different roles. After detailing these points, the paper discusses the relationship between gold, money and derivatives, rejecting their notion that derivatives are some kind of new ‘commodity money’. An important theme absent from Bryan and Rafferty’s analysis is the relationship of financial trading and derivatives markets to parasitism in the imperialist world economy. To illustrate this, the paper notes advantages enjoyed by the major financial powers – the US and the UK – that are the main centres for the origination of derivatives and for derivatives trading.
BIS‘Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010 (Final Results)’2010bBank for International Settlements December available at: <http://www.bis.org/publ/rpfxf10t.htm>
NorfieldTony‘The City of London: Parasite of the World Economy’Economics of Imperialism2012bOctober3available at: <http://economicsofimperialism.blogspot.co.uk/2012/10/the-city-of-london-parasite-of-world.html>
WarnockFrancis E.WarnockVeronica C.‘International Capital Flows and US Interest Rates’International Finance Discussion Papers2005Number 840Board of Governors of the Federal Reserve SystemSeptember 2005
BIS2010ap. 32. There is yet another currency-related ‘derivative’ along these lines called a ‘currency swap’ in which among other things it is usually agreed to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity. The currency swaps market is only around 6–7% of the size of the single-interest-rate swap market however and I will not discuss it here.
Bryan and Rafferty2012p. 103.
Bryan and Rafferty2006bp. 12.
Bryan and Rafferty2006bp. 5.
Bryan and Rafferty2012p. 104.
Bryan and Rafferty2012p. 100.
They refer to Chen Filardo He and Zhu2011after stating that ‘the world’s leading central banks now have massive holdings of a range of securities and derivatives on their books all in the name of managing market liquidity and securing forms of monetary stability’ (Bryan and Rafferty 2012 p. 102). However Chen et al. do not refer to central banks buying derivatives but buying bond-type securities (Chen Filardo He and Zhu 2011 p. 235). One might argue that the Federal Reserve’s ‘Maiden Lane’ assets resulting from the demise of Bear Stearns and AIG are ‘derivatives’ but they are also made up from mortgages loans and various MBS and CDOs.