In his new book, Money, Markets, and Democracy: Politically Skewed Markets and How to Fix Them (Palgrave Macmillan), Dr. George Bragues (Assistant Vice-Provost and Program Head of Business) discusses global financial markets and why nations led by the people, for the people, may be doomed to booms and busts.
What’s the central argument of your new book?
The book is a challenge to the conviction that markets are purely economic entities. Financial markets have become a more socially and politically prominent force in the last few decades and especially during the 2008 financial crisis. I believe that to understand a market, you need to understand the political context in which it operates. The prices you see, the institutional framework, the regulations and even the broad trends depend in the political regime they’re operating under. Making sense of a market means you need to know the basic rules of the political game: who makes the calls and who holds power.
Is there a general trend for how democracies structure their markets?
In democracy, power is held by “the many” and that has a fundamental impact on how markets are structured. It might sound like I’m picking on democracy, but it’s the biggest game in town, so we have to investigate it. Democracies tend to skew the markets in particular ways, namely, they have a tendency to supply more money than is optimal for the system. There’s pressure to keep interest rates low so that money can keep flowing.
What are the consequences of that behavior?
Partly because of that, and because the bond market is eager to lend money to governments, democracies have a tendency to accumulate debt. That’s for a number of reasons, but a major one is that the people who will actually have to pay the debt don’t vote: they’re either under the voting age or aren’t born yet. Politicians also have all the incentives in the world to put the country into debt. They win elections because they promise services and projects like pensions and bridges, but all of that costs money. They can raise that money by increasing taxes, but that’s always politically unpopular, so instead we have deficits.
Has this relatively unchecked spending always been the case?
As democracy consolidated and spread in the 19th and 20th centuries, you had the gold standard, which imposed a constraint on the money supply. After the breakdown of the gold standard in 1971, money became unmoored from any objective value and was instead a creation of the state. Its value therefore changes according to the imperatives of the state.
The enormous size of the derivatives market, I think, is a reflection of the instability that’s been created since 1971. That market is gigantic, around $500 trillion, and it’s like an enormous casino. You’ve got people betting on the price of gold, currencies, bonds, future, forwards, then you’ve options, swaps and credit default swaps. Once money came under political control after the end of the gold standard, it became a lot riskier for people holding financial assets and conducting international trade. They’ve turned to the derivatives market for insurance.
How do we safeguard against the market imbalances in democracy?
I conclude that we ultimately need to go back to the gold standard. We need something that binds and constrains democracy, more so than just central banks, which can succumb to political whims. But, we’re not going back to the gold standard any time soon, so to change our system we’d need to change public opinion. To do that, we’d have to wait for another crisis—democracies only undergo fundamental changes when there’s a crisis, something to challenge the legitimacy of the status quo. Our fiat currency will only change when it gets delegitimized like the gold standard was in the 1970s.