Absent of fiat currency would we have a large derivative market?

Economics Economics Questions
1

I don’t know the exact figure, but the derivatives market before the 2008 crash was estimated to be over 500 trillion dollars. Obviously this is many times the value of the underlying assets of all the world’s stocks, commodities, bonds, etc… that this derivative market is derived from. If I understand correctly what I have read from various Austrian economists and their writings on this site and others then this huge malinvestment’s main cause is the “easy money” created by the Fed.

So, without this easy money policy of the Fed, and especially under a disciplined monetary system such as a gold standard would there be much of a derivative market at all? After all farmers, energy companies, airlines, and many other industries buy and sell option contracts to lock in prices to hedge against volatility or to profit from it if you are a speculator. But surely we all understand the volitility of the underlying assets are due to the Fed’s “easy money”.

Okay, so assuming what I mentioned above is correct and assuming a gold standard would it not be correct that this volatility in the price of say oil for example would not exist since there would be no “easy money” to access and throw into huge speculation bubbles? Therefore derivatives would be nearly non existent?

2

Yes, there would still be a derivatives market because fluctuations in the value of money are only one of many causes of volatility. For example, the weather has a huge impact on the price of crops and there are meteorologists who do nothing but forecast the weather for the derivatives markets.

3

It’s true that getting free money means you will have more money to gamble with. So the Fed’s free gift to the banks surely has something to do with it.

But there is another part to the story. If I lent you 20 million dollars, would you instantly go to Vegas with all of it? Even if I gave it to you outright, would you do that? So why did the banks do that?

The reason is very simple. They gambled with other people’s money [depositors] beacuse the govt [the FDIC] promised to repay the depositors from taxpayer money if the banks could not. So the banks could go to vegas, keep what they won, and have the govt pay what they lose.

That is also the whole concept of a Central Bank, euphemistically called “the lender of last resort.” What that means is, if a bank has screwed up so badly that it wasted all its money, and the time has come to repay its debts but it’s broke, and everyone knows this and so realizes that to lend that bank a penny to help it out is exactly the same as throwing the money away, then soemone will step up to bail out the bank. And who is that? The man in the street. So that no bank need ever fear it will lose money by doing something stupid, because kindly old Mr Fed will print new money and give it to the bank.

4

“Fiat” is Latin for “let it be done;” it usually refers to currencies which are granted “legal tender” status by a government.

The derivatives market is basically bets between large banks on what the real economy will do. There can be such betting {to a degree] whether the economy primarily uses fiat currency, gold, wampum, cattle, debt notes or whatever.

Supposedly at least 4/5ths of derivatives contracts are held by 5 major banks.

Maybe your question is whether these 5 major banks would have such immense bets if there were not a fiat currency?

The short answer is they wouldn’t; the current fiat currency IS private bank notes. Private banks are currently printing our public money supply at interest for private profit, and their currency notes are protected “by fiat” by the government as legal tender.

The full answer is, fiat currency is not necessarily good for the major banks or bad for the major banks, just like the abstract notion of “an army” is not good for or bad for anyone in particular. What matters is which side “the army” or “the fiat” is favoring. When legal tender laws, the Federal Reserve Act and banking regulations favor private bank issued currency “by fiat,” this is good for the banks. If a government issued its own sovereign currency itself, “by fiat,” this would be terrible for the banks and their privately issued debt currency, because people could use it to pay down their debts to the banks, which in turn would shrink the derivatives market.

Julius Caesar, for example, issued bronze coins which he declared, by fiat, could be used to repay debts of gold of equal weight. This was terrible for the private bankers and moneychangers of his time. If the U.S. were to issue, by fiat, a sovereign legal tender currency which could be used by law to pay down debts to banks, it would likewise be very bad for those five major banks and their ability to make huge bets on the derivatives market, because their ‘customers’ would then use the new currency to pay down their debts and get out of debt, destroying the source of power and wealth of private bankers., and, in turn, the derivatives market.

In short, whether a currency is “fiat” or naturally occurring is largely irrelevant to your question. “Fiat” just implies that a currency is created in part by law. A fiat currency which gives special favors to the banks will expand the banks derivatives market, while a fiat currency which does not give special favors to the banks would likely shrink their derivatives market.

5

Just a footnote. I think Benjamin’s position is not typical Austrian, far from it. Just saying.