22 Jan 2011

$4 trillion a day... for what?

I'm still having difficulty in grasping the significance of the numbers in the BIS Triennial Report on Global foreign exchanges. With $4 trillion every day, one is forced to ask why do they do it? Well, no doubt the recent announcements of massive bonuses for traders are linked to this: $10 billion at JP Morgan , $16 billion at Morgan Stanley, $15 billion at Goldman Sachs. But, if you consider that currency trading is presumably running at around $1000 trillion a year ($1000 000 000 000 000), an obvious question concerns how much money the markets can make on such trading. I imagine they only make an absolutely miniscule amount on each trade. Let's suppose that the figure was 0.01%. On average, they would have to trade $10 000 to make a dollar, and $1000 trillion to make the $100 billion needed to pay all those bonuses. Obviously, you can only do this if you have huge financial resources available. But of course, that's precisely what the markets do have - thanks in large part to the trillions of dollars, euros and pounds injected into the markets by governments (and which tax payers will have to pay for decades to come unless something is done).

Obviously, my proposal to put a 1% flat rate transaction tax on such transactions would make such activity pointless. But isn't that normal? It is after all, completely pointless. If anyone can give me any logical reason for maintaining foreign exchanges at this ridiculous level, do let me (and everyone else) know.

I believe that  unless the banks can explain the utility of all this activity (apart from the fact that it allows them to siphon money out of the system to pay their traders bonuses), then there is absolutely no reason why governments should not impose a 1% tax on them. If they did stop all that ridiculous trading and speculation, hey, they might even have something left over for real investment.

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