derivatives, money, finance and imperialism:

5/21/2018 Derivatives, Money, Finance and Imperialism:

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Koninklijke Brill NV, Leiden, 2013 DOI: ./X-

Historical Materialism 21.2 (2013)149168 brill.com/hima

Derivatives, Money, Finance and Imperialism:

A Response to Bryan and Raferty

Tony NoreldSchool of Oriental and African Studies, University of London

[email protected]

Abstract

This paper contributes to the debate on the role of nancial derivatives for capitalism. It respondsto Bryan and Rafertys defence of their analysis and their critique of my own. The paper arguesthat their analysis confuses what a nancial derivative does, and mixes together diferent kinds ofderivative and non-derivative that play very diferent roles. After detailing these points, thepaper discusses the relationship between gold, money and derivatives, rejecting their notion thatderivatives are some kind of new commodity money. An important theme absent from Bryanand Rafertys analysis is the relationship of nancial trading and derivatives markets to parasitism

in the imperialist world economy. To illustrate this, the paper notes advantages enjoyed by themajor nancial powers the US and the UK that are the main centres for the origination ofderivatives and for derivatives trading.

Keywords

derivatives, Marxist theory of money, gold, at currency, exchange rates, imperialism

My article Derivatives and Capitalist Markets explained how the growth of

derivatives trading should be seen in the context of the capitalist crisis. The

argument was that the boom in derivatives was a sign of the decrepitude ofmodern capitalism and I noted that, for the US and the UK especially, the

nancial sector was a key dimension of their economic power as imperialist

countries. Here, I will highlight some important issues on derivatives and

for nancial dealing in general that illustrate the operations of the imperialist

world market. These issues will also bring out the diferences between my

analysis of derivatives and that of Bryan and Raferty.

The response of these authors to my article deserves a reply in two

respects. Firstly, and most importantly, one always hopes that debate will

1. Noreld 2012a, p. 129.2. Bryan and Raferty 2012.


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150 T. Noreld / Historical Materialism 21.2 (2013)149168

lead to a clarication of positions and a development of understanding, if not

necessarily to agreement. Secondly, while Bryan and Raferty appear to have

included me in diferences they have with other authors on this topic withlittle or no justication in some cases they do also raise specic objections to

my analysis that need to be answered. In footnote 11 of my original article, my

comment on their major book on the derivatives market was that by failing

to place derivatives in the context of capital accumulation and crisis, they

present a misleading idea of the role that derivatives play in the system. They

have added to this misleading impression in their reply to me.

Denitions, derivatives and money

Bryan and Rafertys reply begins with a discussion of denitions of money

and they claim that I, among others, reject their thesis largely on denitional

rather than analytical grounds. I do not speak for other critics of Bryan and

Raferty, but my objections are based on an analysis of the role of derivatives,

not on whether derivatives correspond to a tight, unchanging denition of

money. They sum up their core position as follows:

Our proposition is not that derivatives are money, as if they have jumped insidesome pre-given denition of money. It is that derivatives have moneyness andthe conception of money needs to be loosened to take account of how nancialmarkets are working. What do we mean by moneyness? Essentially, we meanliquidity the ability to be converted to something else with minimum loss of

value or time. Cash is therefore the core measure of liquidity for goods and services,but asset markets may be diferent. Because derivatives involve an exposure tothe performance of an underlying asset, but are unencumbered by the necessityof legal or physical ownership of the underlying asset, they are innately readilytransferrable; that is, highly liquid. So liquid, indeed, that they embody money-like attributes.

I agree with the need to analyse how nancial markets are working, rather

than to get sidelined into a debate over denitions. But the problem is that

their analysis of how derivatives work in relation to money is wrong quite

apart from the instances where they do actually say that derivatives aremoney,

albeit in phrases such as distinctly global money or distinctively capitalist

money (as cited in my article). In the paragraph just cited, they compare

the liquidity of cash to the liquidity of derivatives contracts to argue for one

3. Bryan and Raferty 2006b.4. Bryan and Raferty 2012, p. 98.5. Bryan and Raferty 2012, p. 99.


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T. Noreld / Historical Materialism 21.2 (2013)149168 151

money-like attribute of derivatives. The time-limited character of derivatives

contracts means that this is stretching the point somewhat, but I will examine

that issue further below. Later, they argue that

derivatives on exchange rates and interest rates ofer some inter-temporalguarantees of a unit of measure they are a store of value in a world withouta stable unit of measure. They may only store value for a short time perhapsthree months; or only for hundredths of a second in high-frequency electronictrades. They may also have their own vulnerabilities to crisis. But, however briefand fragile, they provide in aggregate an important, liquid store of value. Thatsounds like a money role.

The previous two citations illustrate the two conceptions about nancialderivatives that pervade their analysis: rstly, that derivatives involve an

exposure to the performance of an underlying asset and secondly that they

provide a liquid store of value. I have no objection to the rst interpretation

that is more or less what derivatives do. However, their analysis extends

this aspect of derivatives, through the link with the term liquid, to the view

that derivatives somehow store value. It is this, in particular, that I consider

to be wrong, but it also appears to underpin their conception that nancial

derivatives are a form of money, as I discuss below.

To begin with, however, I will deal with what Bryan and Raferty call my

money-theory howler. In the article, I wrote that there is no derivative-

currency unit of account, measured in pages of contract-terms, or with

denominations determined by how far it is from the underlying asset-value.

I agree that this statement is wrong, and it does, as they say, conate money

with money of account. This was a mistaken phrasing; a correct one to better

express what I meant would have been that there is no derivative-currency

money, with units of account measured in pages of contract-terms, etc. They

declare in their reply that, [o]f course, there is no derivative currency. Good, Iam glad we agree. But I must say that I did not get that impression when reading

their work on derivatives! That was why I made the comment in my article. For

example, part of a summary of key points in their book on derivatives says:

2. In the context of oating exchange rates, nancial derivatives now anchor theglobal nancial system in a role comparable to that played by gold when exchangerates oated freely before the First World War.

6. Bryan and Raferty 2012, p. 100.7. Bryan and Raferty 2012, p. 104.


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3. In performing this anchoring role, derivatives take on the characteristics ofglobal money. They are money that transcends the conventional national systemof money.

4. The foundation for derivatives-as-money is not state guarantees, but a commoditybasis. The last hundred years has not seen a shift away from a commodity basis tomoney, but the re-discovery of a new commodity basis.

That was one place where I found the derivative currency concept, but there

are others. If all they are really saying is that derivatives have been a growing

part of the mechanism for comparing, trading and hedging nancial market

currency values, interest rates, equity prices, etc., then that is not controversial.

However, they seem to be going much further than this with their third, related

notion of how derivatives commensurate diferent forms of capital:

. . . Noreld misses the key issue of derivatives and the analytical challenge theyentail. By framing an exposure to the performance of an underlying asset as itselftradable, things which have not hitherto been priced relative to each other arenow presented in a form where critical dimensions of their relative values can bemutually recognised. The consequence is that derivatives represent a process ofcontinual across-capital commensuration in the active process of accumulation,

while Noreld can only conceive of commensuration as a static process, inexchange: in a sense after accumulation.

This is heady stuf, and it left me feeling that even the particles whizzing around

CERNs Large Hadron Collider would appear to be pretty static compared

to the continual across-capital commensuration in the active process of

accumulation that derivatives seem to perform. However, the fact that in my

original article I located the explosion of derivatives trading in the process of

capital accumulation and crisis should give cause to question the validity of

their argument that I had a static approach to these issues.

In the following sections I will show that Bryan and Rafertys analysis

confuses what is really going on with derivatives. Although in many places

they make perfectly valid and useful points on how derivatives are used and

the roles they play, they end up casting derivatives as the actors in the process,

rather than seeing them far more simply, and far more accurately, as forms of

nancial transaction that have developed in response to volatility in capitalist

markets and problems in capital accumulation more generally.

8. These are summary notes at the start of Section 2 of the book. See Bryan and Raferty 2006b,p. 103.

9. Bryan and Raferty 2012, pp. 1045.


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Special FX derivatives

Much of Bryan and Rafertys analysis of derivatives is founded on their

observation of the foreign exchange forward market, on a misunderstandingof this market and on an attempt to generalise this view to other nancial

transactions using derivatives. In this section I will explain why foreign

exchange forwards are a special kind of derivative, one with characteristics

clearly diferent from interest rate swaps, futures and options.

In their book, and in other articles, they note how the unpredictable

nature of foreign exchange rates (and interest rates) following the breakdown

of the Bretton Woods system made capitalist calculations of value more

troublesome. In the wake of this, derivatives rose to prominence by acting asa means of providing a basis for valuing assets in diferent countries. More than

this, they claim derivatives provide a valuation method that is independent of

national currencies and that they were a means of overcoming the limitations

of national at money. For example:

Derivatives provide what nation-state at money could not provide on a globalscale: they secure some degree of guarantee on the relative values of diferentmonetary units.

and

Derivatives claim to a general role as money comes not so much from theirenormous daily usage, but from the role they play in commensurating a widerange of nancial (and physical) assets, including diverse forms of money. Theyare, in this sense, behind the scenes money, ensuring that diferent forms of asset(and money) are commensurated not by state decree (e.g. xed exchange rates)but by competitive force.

This sounds intriguing, but it is wrong. The forward foreign exchange marketdoes not provide a separate means of valuing assets compared to national

currencies. It is based upon a calculated link between the current exchange rate

10. I do not underestimate the importance of this episode as a benchmark event for new formsof nancial turmoil and for the growth of nancial derivatives in subsequent years, but it wouldof course be a mistake to presume that before 1971 capitalist calculation was a simple, risk-freeprocess. There had already been currency realignments within the Bretton Woods system amongthe major capitalist powers from the late 1940s and, with growing frequency, into the late 1960s. Thegrowth of the eurodollar market and the eurobond market, developments that accentuated

the process by which international capital movements more easily overcame national barriers,are also dated from the late 1950s.

11. Bryan and Raferty 2006a, p. 87.12. Bryan and Raferty 2007, p. 153.


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of one national money for another and the prevailing level of money-market

interest rates in each of the two currencies. Once the latter are given, so is the

forward exchange rate. A company, or bank, trading in foreign exchange mightdeal in the forward market, so that one could argue that it is the forward rate

that drives the spot rate, but there is still a determined link between spot and

forward exchange rates that is given by the interest rate diferential between

the two currencies.

For a simple example, consider that currency A is worth 100 units of currency

B in the spot market, and the 1-year money market interest rate is 2% in country

A and 1% in country B. In that case, the 1-year forward exchange rate is 99. In

other words, given these interest rates (where As rate is higher than Bs), in

one years time one unit of currency A will only buy 99 units of currency B,representing a 1% gap based on the interest diferential. If the 1-year forward

exchange rate were diferent, for example, higher at 99.5, then this would lead

to a market arbitrage deal. In this case, it would pay a dealer to sell 100 B at the

spot rate and buy one unit of A, then invest the A at 2%, and at the end of the

year get 1.02 units of A, including interest. The dealer would do a forward deal

at the same time as the spot deal, agreeing to sell the 1.02 units of A and to buy

B back in one years time at the quoted forward rate of 99.5. This would give

the dealer 1.02 99.5 = 101.49 units of B, so that the return on B is close to 1.5%,

not the 1% interest rate on B in the market. This kind of trade would end upraising the spot exchange rate value of currency A compared to the forward

exchange rate, and so restore the gap between the two to the 1% interest rate

diferential.

Forward FX deals do provide a xed future exchange rate for the parties

involved, but one that is tied to the current spot rate of exchange of the two

currencies and the interest rate diferential on them. The forward exchange

rate derivative does notovercome national currencies and interest rates, nor

does it stand as a separateentity. To believe that it does is like believing that a

pantomime horse is really a horse, not a costume with two individuals inside.

The forward FX deal in fact generates the samevalues as doing the transaction

now, at todays spot exchange rate, and then depositing the funds (e.g. to deposit

US dollars that have just been bought with euros) at the relevant interest rate

until they are required (e.g. to pay a future invoice in US dollars). That the

forward deal is more convenient for capitalists lies in the fact that no funds

(euros) need be advanced now, when such funds may not be available, only

on the maturity of the deal. However, there is an obligation to advance the full

13. The example avoids precise calculations with day counts in order to illustrate the basicmechanism.


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funds later(and also to receive the other currency). This usually happens with

forward deals, although the transaction can also be reversed before maturity,

at a prot or loss compared to prevailing interest rates and exchange rates.Forward FX transactions are only modied forms of a spot transaction. In

these cases, the spot exchange rate and/or the forward exchange rate is used to

compare the values of the two sets of funds in diferent currencies, so that, for

example, $130 million is exchanged for 100 million if the euro-dollar exchange

rate is 1.30. But it is the exchange rateof the two at monies that is doing the

commensurating, not the forward derivative. All the derivative is doing

as Bryan and Raferty recognise, but confuse with other issues is to x the

forward rate at a particular level consistent with the prevailing spot rate and

interest rates.The reason I have gone into some detail on forward FX deals is that these

are nottypical of other nancial derivative operations, such as interest rate

swaps and options. In these latter, there is no future advance of all the funds

underlying the deal at any point. Furthermore, the latter derivatives are

normally valued on the basis of the diferencesbetween contract prices and

prevailing market prices. This diference is multiplied by the notionalamount

of funds involved to result in a settlement sum. These notional amounts are

not exchanged.

Another type of FX derivative deal that is diferent from other derivatives,but in a similar way to FX forwards, is the FX swap. In this case, as the Bank

for International Settlements explains, there is the actual exchange of two

currencies (principal amount only) on a specic date at a rate agreed at the time

of the conclusion of the contract (the short leg), and a reverse exchange of the

same two currencies at a date further in the future at a rate (generally diferent

from the rate applied to the short leg) agreed at the time of the contract (the

long leg). In more normal language, one can say that this kind of deal occurs

when one party to the transaction needsfundsin a currency that it does not

own for a particular period of time. It then buys the currency it wants, handing

over the currency that it owns in exchange, but reverses the deal at an agreed

time later, buying back its original currency. The two deals are usually done

14. Except in the case of actually exercising an in-the-money option, rather than closing itout at a prot. Commodity and bond futures contracts have further complications on deliveryof the underlying commodity or security if the contract is not closed out, but these need not bediscussed here.

15. BIS 2010a, p. 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 amountsin diferent currencies at a pre-agreed exchange rate at maturity. The currency swaps market isonly around 67% of the size of the single-interest-rate swap market, however, and I will notdiscuss it here.


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at exchange rates based again on the spot exchange rate and the relevant two

interest rates. This kind of deal is common for capitalist companies that have

business in foreign exchange. It is important to stress here that the actual fundsare exchanged, since that is the whole point of the deal. This is something quite

diferent from interest rate swaps, etc.

Bryan and Raferty refer to the recent use of large-scale liquidity swaps

between major central banks. These are similar to the FX swaps just noted.

They argue that these show how liquidity itself is drawing away from being

dened with reference to cash or any particular stock of money, and moving

towards the diversity of asset forms provided in derivative markets. Well,

the point can be made much more simply and accurately: these are essentially

just short-term collateralised loans! The US Federal Reserve lent dollars to theEuropean Central Bank, the Bank of England, etc., and got collateral in the

form of the other banks currency. Then, the other banks repaid the dollars

at the agreed time, plus interest, and got their own currencies back again.

These transactions were signicant for illustrating the scope of the nancial

crisis that took place and they also show the key role of the US dollar and

the powerful position of the US in the global monetary system but Bryan and

Raferty are too enthralled by foreign exchange derivatives, or perhaps the

fact that foreign exchange rates are not xed, to see that this is merely a short-

term currency loan between central banks.Foreign exchange forwards and swaps are longstanding forms of nancial

dealing, predating by far the breakdown of Bretton Woods in the early 1970s.

Prior to 2010, the BIS used to include both spot transactions and these forms of

dealing under the heading of traditional foreign exchange markets to separate

them from the more evidently derivative deals such as options and currency

swaps, and many central banks still make this distinction. This reected the

reality that FX spot rates, FX forwards and swaps are part of the same market,

linked by the relevant money market interest rates. All that is happening in

these markets is that the gap between the spot and forward exchange rate is a

function of the interest rate diferential between the two currencies involved.

None of the rates is xed, and all that is done is to set a particular forward FX

rate today, based on the currently prevailing spot rate and interest rates.

Derivatives and non-derivatives: what they do and what they do not

In this section, I take issue with some other examples Bryan and Raferty use

to back up their understanding of derivatives. I will rst examine interest rate

16. Bryan and Raferty 2012, p. 103.


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swaps, then I will look at some other nancial products, ones whose description

as derivatives is suspect. This risks getting into a debate over denitions (this

time for derivatives), but I hope instead that this discussion highlights furtherwhat is actually going on.

Bryan and Raferty claim that Derivatives, especially through swaps . . .

establish pricing relationships that readily convert between (we use the term

commensurate) diferent forms of asset. Derivatives blend diferent forms

of capital into a single unit of measure. Elsewhere, they also make a more

explicit, general claim that for any corporation, at any time and any place,

derivatives present a real-time measure of asset values. But this is just wrong.

It confuses the degree to which foreign exchange rates measure the value of

assets (in other currencies) with the operations of an interest rate swap andother derivatives.

Take a simple example. In an interest rate swap, a company may agree to

receive a xed 1% rate of interest on a notional sum of $50 million and to pay a

variable rate of interest on the same sum over the next ve years. The notional

value of the swap is $50 million, but the market value of the swap will vary

according to the diference between the 1% xed rate and the variable rate.

This value could be positive, negative or zero. The swap derivative is not a

store of value for the $50 million, even though that is its notional amount.

All the swap represents is a way of changing the form of interest rate exposurefor the company. In this case, the company wants to have a xed rate for its

income and agrees to pay the oating rate, for example whatever six-month

LIBOR happens to be every six months for the next ve years.

Derivatives such as interest rate swaps can be used to hedge against moves

in nancial market prices, but that does not make them a store of value. As

explained in my original article, all derivatives have a time limit to expiry.

During its life, the derivative will be valued in relation to the diference

between the contract price and the price in the market, perhaps in a complex

manner. On expiry, this diference value, plus or minus, is xed. After expiry,

this function is no longer performed. Bryan and Raferty obscure this by

appealing to derivatives in aggregate, presumably to assert that another

derivative will come along and take up the role of store of value when the

rst one has expired. However, this only admits the fact that the derivative is

nota store of value. Even during its eeting existence in the realm of nancial

17. Bryan and Raferty 2006b, p. 12.

18. Bryan and Raferty 2006b, p. 5.19. I leave out of account amortising swaps and step up swaps, where the principal is reduced

or increased according to an agreed, predetermined formula.20. Bryan and Raferty 2012, p. 104.


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market transactions, the market value of the derivative contract does not

store anything other than a calculation of the diference between the contract

price and the relevant market price, multiplied by the notional value of thecontract. It does not store the value of the underlying asset, nancial security,

etc. Bryan and Raferty ip between this erroneous store of value concept and

a (slightly) more correct one that derivatives measure the performance of an

underlying asset something that canbe done because they are a diference

measure.

Turning to some other nancial products, Bryan and Raferty argue that

these show both a blurring of the concepts of money, commodity and capital,

and the way that derivatives can become a store of value in a world without a

stable unit of measure. There are, indeed, nancial products like convertiblebonds that blur the categories of debt and equity, etc., and some may also have

features related to options. But it is a bit odd of them to include preference

sharesin their list of examples, since these are not derivatives at all, only a type

of equity security.

Collateralised debt obligations (CDOs) and mortgage-backed securities

(MBS), also cited by Bryan and Raferty, are another problem. These are very

similar to normal bond securities, rather than being derivatives. With CDOs,

the only diference is that the interest and principal payments they ofer

might be based on the returns from othersecurities (the fact that CDOs maybe divided up into diferent tranches with diferent degrees of credit risk is a

separate issue). This makes them a derivative only in this respect, because the

CDO is still basically a bond in its payment structure, though one whose credit

risk will depend on the risk associated with getting the returns from the other

underlying securities. A normal bond, by contrast, is one where the credit risk

is on the company or country that oated the bond and which is responsible

for the interest and principal payments.

The CDO is nevertheless not a derivative security in the way that swaps,

options and futures are. In the latter cases, the value of the derivative security is

a function of the diference between the contract price(s) and market price(s),

which could then result in a positive, zero or negative market value. A CDO

is only worth zero if all the underlying assets have defaulted and there is no

prospect of recovering any funds. With mortgage-backed securities (MBS) they

are even closer to a regular bond, since the payments on the MBS are usually

made up directly from a range of mortgage interest and principal receipts.

In my original article, I was cautious about labelling securities such as CDOs

and MBS as derivatives for this reason and left their status unclear. On further



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consideration, I would not put these securities under the heading of derivatives

except where they also have other features, as in so-called synthetic CDOs.

This essentially non-derivativestatus of MBS is the reason the US FederalReserve could purchase MBS from the private sector in an efort to provide

liquidity to the nancial markets. These purchases cannot be described as

the Federal Reserve buying derivatives, as Bryan and Raferty claim. They are

the Federal Reserves, and other central banks, purchases of bond securities,

as the BIS article to which they refer notes.

Money, gold, derivatives and value theory

In this section, I will discuss my conception of global money and its relationship

to nancial derivatives. This will introduce some other aspects of derivatives

and imperialist nance to which Bryan and Rafertys analysis pays little

attention. I will not comment on their implicit attribution to me of views I

do not hold; for example, that a core denition of money is as a means of

exchange. The issue I will focus on is what is global money, and whether

derivatives have taken over the previous role of gold in some fashion.

Gold has an intrinsic value as a commodity because it is a product of social

labour. Its physical characteristics have made it suitable for acting in the roleof money, but the degree to which it does this depends especially on the role

of the state in organising the monetary system. Golds actual use as money has

long been restricted within nation states, but it has more often been used for

dealings between them when payment by national at monies is unacceptable.

Despite its own intrinsically changing value, gold was seen as a stable measure

of value, at least compared to at money that could be undermined by state

authorities. However, this did not mean that only gold was used in exchanges

between countries. Even in the classical Gold Standard period of the nineteenth

22. They refer to Chen, Filardo, He and Zhu 2011, after stating that the worlds leading centralbanks now have massive holdings of a range of securities and derivatives on their books, all inthe name of managing market liquidity and securing forms of monetary stability (Bryan andRaferty 2012, p. 102). However, Chen et al. do not refer to central banks buying derivatives, butbuying bond-type securities (Chen, Filardo, He and Zhu 2011, p. 235). One might argue that theFederal Reserves Maiden Lane assets, resulting from the demise of Bear Stearns and AIG, arederivatives, but they are also made up from mortgages, loans and various MBS and CDOs.

23. They spend half a page discussing in their Reply to Tony Noreld how for some analyststhe core denition of money is a means of exchange and that this is a mistake (Bryan and Raferty

2012, pp. 99100). However, there is nothing in my article to suggest that I hold such a view, andI reject this and other examples of guilt by association as a way of debating.

24. See, for example, Frances demands in the late 1960s for payments in gold from the US,rather than France being willing to accept increased dollar balances.


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century and up to 1914, Britain managed a gold-sterling standard. Then, the

pound sterling was promoted to be as good as gold, so a bill on London was

seen to be as good as actually having the shiny yellow metal. In fact the billwas even better, being readily exchangeable in nancial transactions and

ofering an interest yield. This worked for as long as there was international

condence in British economic strength and policy, things that would maintain

the value of sterling in relation to gold. This position, of course, came under

pressure during the First World War and in the inter-war crisis.

In the post-1945 period until the 1960s, with the US clearly the dominant

economic power, the US dollar also became as good as gold. The Bretton

Woods system had the US dollar as its foundation, with other currencies

values being xed in relation to the dollar and only the US dollar beingexchangeable into gold by the US central bank, and then only on request from

foreign central banks. The dollar, like sterling before, was a at currency. But

governments and capitalists worldwide accepted its role of having aclaim on

value produced, not simply in the national arena. It was through the 1960s,

however, that the dollars role was undermined by the recovery of rival powers

to the US. Although none of these was individually a signicant challenge to

US economic power, together they ended up owning far more dollar assets

in their reserves than the US had in terms of gold. Through the 1960s, the

Bretton Woods equation that one troy ounce of gold was worth $35 was slowlyundermined. It was broken completely by 1971.

We should look upon the dollars value, or any other at currencys value,

both pre- and post-1971, as the degree to which it represents a claim on social

labour. This cannot be represented directly as a certain amount of socially

necessary labour time, but only in the form of an exchange value. The exchange

value with gold is neither a unique nor a necessary reference point. The at

currencys value is clearly contingent upon a range of diferent factors. Within

the national sphere, the dollars value will be judged in terms of its purchasing

power, its exchange-value with a myriad of commodities. Internationally, the

extent of its claim on resources will also depend on its ability to be used as a

means of purchase for commodities, or to be exchanged at a particular rate

for the monies of other countries. This is afected by the rules each country

has for exchanging national monies, rules greatly inuenced by the dominant

power(s) in global nancial markets. Fluctuations in the dollars exchange rate,

or the exchange rates between third currencies, obviously disrupt capitalist

25. See Eichengreen 2011 for a useful and concise summary of international monetarydevelopments.

26. This imbalance rst occurred in 1960 (cf. Eichengreen 2011, p. 50).


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calculations for international deals. This is the uncertainty (among others)

that derivatives can address.

Bryan and Rafertys analysis of derivatives is based around thesedevelopments, and they argue that there has been a problem ever since the

decline of gold as global money, because the use of national currencies (even

under the Bretton Woods system) could not rule out exchange rate instability:

Our argument is that, following the decline of gold as global money, capital hasgravitated towards an alternative basis to the global nancial system, and itshows this tendency for one basic reason: national currencies . . . cannot meet therequirements of both domestic monetary policy and global monetary stability.The threat of exchange rate instability is on going. Accordingly, products emerged (nancial derivatives) to deliver what pureexchange processes could not. By forming a network of anchors, derivatives arepermitting capital and commodities to ow as if there were a single anchor.

Later in their book, elaborating on this point, they argue:

They are not therefore a xed single anchor, but a exible series of many smalloating anchors. Critically, they can perform this function because they exist atthe intersection of money and commodities: derivatives themselves are money

(they perform a money function in pricing) and commodities (they are tradedproducts) at the same time. . . . Derivatives, in their anchoring function for global nance, play the roleof a commodity money. While commodity money is usually associated withemphasising the commodity characteristics of money (gold); derivatives alsohighlight the monetary characteristics of all commodities.

But here, and elsewhere, they are mixing up two things: the role of gold as

a measure of value and the inherent instability of exchange processes.

Derivatives can provide a temporary x for an exchange rate or interest rate

what they call an anchor, or, more accurately, a oating anchor essentiallyby providing a form of future price insurance based on todays prices. However,

that does not mean (as I showed above) that the derivative measures or stores

asset values.

Nor does it mean that derivatives play the role of commodity money in

place of gold. Here, Bryan and Raferty get themselves caught on a barnacle

with their anchoring metaphor: Financial derivatives are produced (as

contracts) and ofered on the market as products of the labour of nancial

27. Bryan and Raferty 2006b, p. 106.28. Bryan and Raferty 2006b, pp. 1312.


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institutions and operatives that stitch up the deals. Possibly in deference to

a Marxist view of commodities as products of social labour, Bryan and Raferty

want to extend the status of commodity to derivatives by arguing that labouris expended on their production. However, here they commit what one might

call a value-theory howler.

Capital operating in the sphere of circulation may ofer all kinds of nancial

services to companies or individuals, as products that it sells. Such products

may even be derivatives, used as a means to limit interest rate or exchange

rate risk. However, such capitalist operations can only exchange one form of

existing value for another, they cannot produce any new value or transfer value

from the resources they use. They are simply a cost to the overall capitalist

commodity system, even if paying that cost may be benecial to the capitalistswho are in the productive sphere of the economy. All the costs to make the

products and the revenues the nancial sector gains from them represent a

deductionfrom the total surplus value that the capitalist system produces. This

makes the nancial sector a burden on society as a whole, although it can still

be very protable for individual companies, and also for countries, as I will

discuss in the next section. The nancial sector canassist the production of

value, and the raising of productivity levels, but these things are actually done

by theproductivesector of the economy. These points are made to summarise

the role of the nancial sector from the point of view of capital investment andaccumulation.

But how can we understand what Bryan and Raferty call the commodities

produced by this unproductive nancial services sector, in particular those

things called derivatives? To say the least, these would be weird commodities.

Their costs of production are irrelevant to their value, which remains zero

in terms of any value transferred or created. FX forward and swap deals do

imply an actual transfer of funds, as noted earlier, but the commodity value

of this deal is only a diference measure based on changes in market prices

(and the value of the transferred funds is determined by the value represented

by the at currency, not by the value of the derivative). In the case of interest

rate swaps, etc., as discussed before, there is no direct transfer of funds, and

the derivative commodity money could have a positive or negative value, not

29. Bryan and Raferty 2006b, p. 153.30. See Noreld 2013 for a discussion of these issues related to capitalist protability and the

role of nance for imperialism.

31. Of course, nancial companies will pay attention to their costs and to their volume ofdealing, and it is also true that a more ecient dealing operation will tend to be more protable.However, an ability to appropriate a portion of value produced elsewhere does not make thisactivity productive.


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based on anything to do with the amount of sweat from the brow of derivatives

traders. The world of derivatives is full of wonder and torment, but Bryan

and Raferty too often try to render it sublime through a mystifying mode ofexpression, as Marx once wrote.

Finance, imperialism, parasitism and derivatives

The biggest problem with Bryan and Rafertys view of derivatives, however,

is that it pushes into the background the role of the US dollar and the role of

nance for the major imperialist powers. While derivatives have obviously not

replaced national money, they argue that they have efectively transcendedthe national basis of contemporary money. The point I would stress by

contrast is that a small group of major powers have privileged positions in the

global nancial markets, something that greatly modiesfor themwhat Bryan

and Raferty call the new, more dynamic (and ruthless) edge to capitalist

competition that comes from derivatives. Here I would single out the US

and the UK, which can use their positions at the centre of the global nancial

system as a means of appropriating value from other countries.

Two examples will illustrate this point. As a way of introducing these, rst

note that simple models of exchange rate determination usually focus on someversion of purchasing power parity, based on the idea that relative productivity

and price competitiveness set the fundamental value for one currency versus

another. If the value of one currency is too high, a trade decit results, and

the supply-demand balance for the currency turns negative, so reducing its

value in the market, andvice versa. However, the totalpicture for the demand/

supply of a currency is quite diferent in reality. It has less to do with the value-

productivity of national capitals and much more to do with their position in the

global economy. I do not want to go too far in making this point. A country will

need to have some position of economic strength in order then to be able togain power in international economic relations. However, the examples I give

next indicate hownancialstrength can bring its own rewards for particular

imperialist countries.

My rst example is for the US. Aside from trade ows, the determination

of the US dollars value is impacted signicantly by the demand for and

supply of dollars driven by the ows of nance. For all currencies, banking

ows, together with direct and portfolio investment ows, can easily be more

important inuences on the exchange rate than trade in goods and services.

32. Marx 1974, Chapter 24, p. 397.33. Bryan and Raferty 2006b, p. 136.


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However, if a country is a major nancial power like the US, it can attract

ows of foreign funds into its equity and bond markets, or can benet in other

ways from countries keeping assets denominated in US dollars. Although bythe 1970s US economic strength had clearly declined compared to other major

countries and the dollar had devalued, this did notlead to a lasting setback for

US nancial strength. The ensuing nancial turmoil actually boosted the role

of the US dollar in global markets, given the inability of any other country to

ofer an alternative world money. The dollar remains by far the major global

currency for international trade deals and nancial ows, with dollar-based

asset markets being the largest and most liquid for international investors.

There were various attempts by continental West-European powers to build

an alternative system to protect them against what they saw as US-based risks,and also to gain some of the US advantages, culminating with the euro project.

China has much more recently been building up the international role of the

renminbi. However, China is starting from a minuscule position. In 2010, the

US dollar was on one side of 85% of all foreign exchange deals, compared to just

39% for the euro and a mere 1% for the renminbi.

This is how the US was in the position to do the FX swaps that Bryan and

Raferty cited. It was a case of central banks outside the US having a desperate

demand for US dollars to prop up their banks and companies international

liquidity positions. This had nothing to do with derivatives per se. Asidefrom the power accrued from this role of essentially being in charge of global

liquidity, the US of course gains a great deal of value from it. In 2011, the US

gained a net $235bn in 2011 from foreign investment income, more than double

the amount in 2007, based on its ability to pay close to zero interest rates on

US government debt owned by foreigners. This ability is founded on the role

of the US dollar as the main global currency. Having a net foreign investment

incomeis extraordinary, given that the US is a big netdebtorcountry, but this

is because it earns much more than a near-zero rate of return from its foreign

investments, especially from its direct investments abroad.

Notably, the UK is the only other country in the world with a net investment

earnings surplus despite having a net debt position. Britain manages this feat

helped by its ability to attract low-cost funds via the banking system, given

that the UK is the location of the worlds biggest international banking centre.

This is another sign of the economic privileges accruing to those powers

dominant in nance.

34. BIS 2010a, Table B4, p. 12.35. Net foreign investment income gures calculated from BEA 2012, lines 13 and 30 in Table 1,

p. 59.36. See Noreld 2011 for a discussion of this mechanism.


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My second example is a diferent aspect of privilege in value appropriation:

nancial services. A question Bryan and Raferty do not ask is why more than

half of the global derivatives market is based in the UK (principally London)and the US (principally New York and Chicago) if derivatives have transcended

national money systems. Take foreign exchange: the UK is the base location for

global dealing, having 37% of the total turnover; the US has 18%. London has

by far the biggest share of the global FX market in spot, forward, swaps and

options transactions. The bulk of UK-based trading is in currencies other than

sterling, so the dealing has indeed gone beyond the national money system.

But this perspective overlooks one critical role that British imperialism plays:

it is the broker for global capitalism. Britain takes a cut from the value of more

than a third of foreign exchange deals in the world economy. It is even moredominant in the so-called over-the-counter (OTC) interest rate derivatives

market, made up of direct deals between banks and their customers, accounting

for 47% of turnover in 2010, while the US had 24%.

Evident advantages for the UK economy are the large earnings from

nancial services trading. Net nancial services earnings amounted to nearly

40bn in 2011, covering almost 40% of the UKs 100bn trade decit in goods

in that year. The UK has the second biggest surplus on nancial services in

the world, usually just behind that of the US. If insurance services are added

to the reckoning on this account, then the UK surplus is the highest. Thesenet foreign revenues are a measure of what value is deducted from the world

economy by nancial operations based in Britain. US politicians have been

angered by the way that trading derivatives in London has led to big nancial

scandals hitting their own pockets, from the collapse of AIG in 2008 to the 2012

loss of over $6 billion by JP Morgans London Whale. However, this overlooks

the fact that an Anglo-American partnership designed this system, with at least

implicit government support and approval, and it has been mutually benecial

to both powers.

While the US is top dog in world nance, the UK is top leech. Both countries

have exceptional positions in their ability to appropriate surplus value from

the rest of the world via the nancial system. It is a big mistake to look upon

the growth of nancial markets, and certainly the derivatives markets, as

something that occurs as a transnational phenomenon outside of the interests

of these major imperialist powers and outside of their political inuence,

37. Figures quoted here and below are from BIS 2010a and 2010b. See Noreld 2012b for a

review of the location-based statistics for global nance.38. ONS 2012, Table 3.6.39. Helleiner 1996 gives a valuable analysis of the evolution of the modern nancial system,

but in my view he greatly underestimates its contemporary importance for British imperialism.


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though that is not to say that they can control these markets. As I noted in my

original article, it is no wonder that these powers have done so little to curb the

nancial sector, despite the unprecedented nancial crisis!

Derivatives, imperial economic power and the crisis

In this section I will briey discuss the relationship between derivatives and

the capitalist crisis. Bryan and Raferty say that in my original article my

agenda was that an understanding of derivatives be placed at the service of

theories of crisis and the falling-rate-of-prot tendency. That is true, but it

is not the whole story. My principal aim was to show how derivatives wereone expression of parasitism under contemporary imperialism, exemplied

by Anglo-American nance. But to do this I also felt it was important to

understand the dynamic behind the growth of derivatives trading. In my view,

that dynamic could only be explained by problems of capital accumulation

and crisis, underpinning which was a crisis of protability. It is worth spelling

out where I did indicate the link with protability to show that there is no

analytical leap here, as Bryan and Raferty claim.

In my derivatives article I drew attention to the way in which trading of

these nancial instruments boomed in response to low yields on nancialassets and pressures on bank protability. I also argued that these low yields

were related, although not in a straightforward manner, to low protability

on productive capital investment. The logic was that one would expect lower

protability on productive investment to lead to lower dividend yields and

equity price increases, together with lower bond yields, although there may

be exceptions to this. In terms of empirical evidence supporting this view, two

relevant facts were noted: yields had been falling (in both nominal and real,

ination-adjusted terms) and protability was weak in the late 1990s and early

2000s. Citations from reports of a number of asset managers documented thefalling yields; a chart with a measure of the US rate of prot illustrated the

relevant trend. The causal links from low protability and low yields to

the propensity for increased nancial trading (and speculation) with derivatives

should be clear, though it is true that such trading is not only driven by low

yields.

However, one important feature of global capitalism that developed

through the rst decade of the twenty-rst century was not included in the



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previous logic. This is how increased exports from China and other low-wage

countries to the US and other rich, consuming countries helped produce the

Greenspan conundrum, whereby long-term US Treasury yields were lowerthan previous economic/nancial relationships would have suggested. In

addition to anything directly resulting from the question of low protability

on productive investment that I noted before, this also helped reduce bond

yields in major countries.

This happened in two related ways. Firstly, cheap imports had helped lower

US (and other countries) ination rates, and, given the common central bank

policy of focusing on ination, this helped to reduce nominal yields. Secondly,

a counterpart to the Asian trade surpluses with the US and other countries

was their large-scale purchases of major country bonds a means by whichthey tried to stabilise their exchange rates. The end result was lower yields

on US Treasuries and in other major government bond markets. For the US,

this efect was documented in an important article published by the Federal

Reserve. These developments show how a combination of economic power

control of supply chains, etc. and nancial power the role of the US dollar

as a reserve currency can combine both to give an imperialist power many

privileges and also to sow the seeds of the next crisis.

Conclusion

I did not plan to write about derivatives markets any further after my original

article inHistorical Materialism, except to the extent that this would assist my

research into nance and contemporary imperialism. I look upon derivatives

markets as being essentially rather dull from a theoretical perspective, once

the basic relationships have been grasped, despite the exponential growth of

trading in these markets and their role in the crisis. However, my motivation

for spending extra time on this issue has been to throw more light on nancialtransactions, ones that are important but which, not surprisingly, remain a

mystery to many people who might otherwise have a good knowledge of the

global crisis that engulfs us all.

My diferences with Bryan and Rafertys analysis of the nancial derivatives

market are many. However they deserve credit for highlighting the importance

41. I noted that trade with China and other countries could have boosted US protability

beyond what otherwise it would have been (Noreld 2012a, p. 115), but I did not examine thisissue in any more detail.42. See Warnock and Warnock 2005.


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of these markets that Marxist theory had previously ignored, and for stressing

that contemporary forms of capitalist nance must be addressed, and not

just dismissed as speculation or in other ways that avoid a serious analysis.Nevertheless, the key message from my original article, and from this reprise, is

that one cannot understand nancial markets today, or indeed the crisis, except

by situating developments in the context of contemporary imperialism.

References

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Materialism, 14, 1: 7595. 2006b, Capitalism with Derivatives: A Political Economy of Financial Derivatives, Capital and

Class, Basingstoke: Palgrave Macmillan. 2007, Financial Derivatives and the Theory of Money,Economy and Society, 36, 1: 13458. 2012, Why We Need to Understand Derivatives in Relation to Money: A Reply to Tony

Noreld,Historical Materialism, 20, 3: 97109.

Chen, Qianying, Andrew Filardo, Dong He and Feng Zhu 2011, International Spillovers of CentralBank Balance Sheet Policies, BIS papers No. 66, available at: .

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