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Chapter 33 Who does capital move for (3)
3. Currency internationalization.The function of gold as a world currency has degenerated, and people can transfer the purchasing power of currencies between countries through international exchange.Not only the U.S. dollar, Deutschmark, British pound, and Japanese yen can be used as international settlement currencies, but also the currencies of a large number of moderately developed countries and even developing countries have gradually become freely convertible currencies, moving towards the direction of world currencies.

4. The globalization of modern information networks.The popularization and development of the modern information revolution in the international financial field has enabled the transfer of funds between countries to be completed instantly through telecommunication equipment, thus linking the financial markets of various countries into a unified whole in time and space.

5. Convergence of price signals.The interest rate and exchange rate of any country deviate significantly from the interest rate parity relationship, which will lead to the rapid flow of social hot money among different countries, resulting in large fluctuations in the price of the foreign exchange market in one or several countries, so that the price signals of the global financial market tend to be consistent .

Financial globalization has both positive and negative effects on the economy and finance of various countries.The dual effect is particularly pronounced for developing countries.For developing countries, the positive effect of financial globalization is first reflected in the introduction of foreign capital from the international market.Developing countries generally face the contradiction of shortage of funds. To a certain extent, financial internationalization can make up for the funding gap in economic development, and promote the diffusion of technology and the exchange of human resources.In addition, it is also conducive to learning the advanced experience of financial operations in developed countries and improving their own financial efficiency and financial innovation.

But globalization is a double-edged sword, just like God opens a window for you, and not only sunshine but also dust come in.The negative effects of financial globalization cannot be ignored.For developing countries, participating in financial globalization is in their own long-term interests.However, because its financial industry is in a weak position, its ability to resist financial risks is still relatively poor.If foreign financial institutions enter on a large scale, the financial system will inevitably suffer shocks.Financial globalization has opened the door to international liquidity, and international hot money can freely flow in and out to create risks.Out of profit-seeking motives, international hot money rushes in and out, which will lead to serious asset bubbles and financial turmoil.The test of financial globalization is more financial supervision and regulation, because the free flow and profit of financial capital on a global scale will weaken the regulation of monetary policy.

For developing countries whose economies are on the rise, the temptation of international capital is huge.But the binary effect of financial globalization cannot be ignored either.On the road of globalization, it is necessary to do a good job in supporting system construction and financial development, otherwise it will be difficult to deal with the impact of financial opening.Just like the reform of China's exchange rate system in 2005, when domestic voices for liberalizing the financial market became louder and louder, an unexpected financial crisis roared from the other side of the ocean.The personal experience of countries such as Europe and the United States has proved that participation in financial globalization brings both opportunities and huge risks.

Virtual economy: a "castle in the air" that may collapse at any time

On a street, there are two people selling sesame seed cakes, and there are only two people, we call them sesame seed cakes A and sesame seed cakes B.They can keep their capital by selling each sesame seed cake for one yuan.

A game has started: A spends one yuan to buy a sesame seed cake from B, and B also spends one yuan to buy a sesame seed cake from A.A spends another two yuan to buy a sesame seed cake from B, and B also spends two yuan to buy a sesame seed cake from A, and the cash is delivered.A spends another three yuan to buy a sesame seed cake from B, and B also spends three yuan to buy a sesame seed cake from A, and the cash is delivered.

So from the perspective of the entire market, the price of sesame seed cakes soared, and it rose to 60 yuan per sesame cake in a short while.But as long as A and B have the same number of biscuits, no one makes money, and no one loses money, but their assets "appreciate" after revaluation!A and B have "wealth" that is many times higher than in the past. Their social status has increased a lot, and their "market value" has increased a lot.

At this time, there was a passer-by who knew that the biscuits cost 60 yuan when he passed by an hour ago, but now he was surprised to find that the price was 200 yuan.He bought one without hesitation. He was sure that the price of biscuits would rise, and there was room for the price to rise, and someone gave a "target price" of more than [-] yuan.

Under the demonstration effect of "making money" from Shaobing A and Shaobing B, and even from the demonstration effect of passer-by C making money, more and more passers-by will buy biscuits in the future, and more and more people will participate in the transaction, and the price of biscuits will rise steadily , everyone was very happy, because it was strange: no one lost money.

Someone asked: Will buying biscuits never lose money?Apparently yes.But suddenly a person came to the market one day and said, "It's just a biscuit, and the cost price is 1 yuan." This sentence startled the dreamer, and people suddenly realized that the biscuit was indeed not that high in value.As a result, people rushed to sell, and the price of biscuits dropped sharply.At this time, who made the money?It's the one with the fewest biscuits.

This story of selling biscuits is equivalent to a condensed version of the stock market.The stock market, obviously, is a representative product of the virtual economy.The fictitious economy is relative to the real economy and is the inevitable product of economic virtualization.It is a new term that has appeared in recent years. The most common explanation refers to economic activities related to the circular movement of fictitious capital mainly based on the financial system. Simply put, it is the activity of directly generating money from money.

The earliest origin of the virtual economy can be traced back to the commercial lending behavior between private individuals.For example, A needs to buy some kind of goods urgently, but he himself does not have enough funds, and B happens to have a sum of money idle on hand, so A borrows a certain amount of money from B, and promises to pay back the principal within a certain period of time. interest.The IOU in the hands of B is a prototype of fictitious capital, which gains value through the cycle of borrowing and repayment.At this time, Person B did not engage in actual economic activities, but only made money through a virtual economic activity.

When the fictitious economy develops to a certain extent, it often leads to a bubble economy, which leads to a financial crisis. The term "bubble economy" originated from the famous South China Sea bubble incident in history.

The instigator of the South Sea Bubble incident was the British South Sea Company.The South Sea Company was established in 1711. At the beginning of its establishment, in order to support the restoration of the British government's credit, the company subscribed for government bonds with a total value of nearly 1000 million pounds.In return, the British government implemented a permanent tax rebate policy for the company's wine, vinegar, tobacco and other commodities, and gave it the monopoly of trade in South America.The South Sea Company had a well-known attempt at the beginning of its establishment, which was to seize the huge wealth hidden on the eastern coast of South America.At that time, everyone knew that there were huge gold and silver deposits buried underground in Peru and Mexico. As long as the processors in England could be sent to the coast, tens of thousands of "bricks and silver stones" would be continuously shipped back to China.The public is full of confidence in the development prospects of Nanhai Company.Therefore, at the same time, the supply and demand of stocks were seriously unbalanced, making the stocks of the South Sea Company very popular for many years, and the price continued to rise.

In 1719, the British government allowed the winning bonds to be exchanged for shares in the South Sea Company.At the end of the same year, the removal of trade obstacles in South America, coupled with the public's expectation of rising stock prices, promoted the conversion of bonds into stocks, which in turn led to the rise of stock prices. From January 1720, the stock price of the South Sea Company rose in a straight line. The 1 pounds per share of the company rose to more than 1 pounds per share in July, an increase of 128% in six months.

Under the demonstration effect of the skyrocketing stock price of the South Sea Company, the stocks of more than 170 newly established joint-stock companies in the UK and all company stocks have become objects of speculation. People from all walks of life, including soldiers and housewives, and even the physicist Newton They were all involved in this vortex.People have completely lost their minds and don't care about the business scope, business status and development prospects of these companies. They only believe what the promoters say about how their companies can make huge profits. People are afraid of missing the opportunity to make a lot of money.For a time, the stock price skyrocketed.The average increase is more than 5 times.

However, the operation of Nanhai Company did not go as expected, and the profit was very small. The final price of the company's stock was completely out of touch with the actual business prospect of the listed company. In June 1720, in order to stop the expansion of various "bubble companies", the British Parliament passed the "Anti-Bubble Company Act" (The Bubble Act).Since then, many companies have been dissolved and the public has begun to wake up.Suspicions of some companies gradually extended to the South Sea Company.Beginning in July, foreign investors first sold Nanhai stocks and withdrew their funds, and the military issued an order requiring soldiers to return to their posts.As the speculative frenzy cooled, South Sea shares plummeted, falling as low as £6 per share in September and finally down to £7 in December. The "South China Sea Bubble" finally burst.

At the end of 1720, the government liquidated the assets of the South Sea Company, and found that its real capital was running low, and those investors who bought South Sea stocks at high prices suffered huge losses.The South China Sea bubble event was the first economic event caused by excessive speculation in the world stock market.Since then, virtual economy and bubble economy have been staged in economic activities. The US financial turmoil in 2008 made people realize their horror even more.People seem to have reached a consensus on this, that is, the virtual economy cannot exist in isolation and should be based on the real economy to a certain extent, otherwise the bursting of the bubble may trigger a tragic economic crisis.

Adverse Selection: Ignorant Choice under Confidence Risk
Suppose there is a second-hand car market. Although the cars in it look the same on the surface, their quality is very different. The seller knows the quality of their car very clearly, but the buyer has no way of knowing the quality of the car. The distribution of quality from good to bad is relatively even. The price of the best quality car is 50 yuan. How much will the buyer be willing to pay for a car whose quality he does not know?The most normal bid is 25 yuan.So, what does the seller do?Obviously, the owner of a "good car" with a price of more than 25 yuan will not sell his car in this market.In this way, it enters into a vicious cycle. When car buyers find that half of the cars have withdrawn from the market, they will judge that the rest are cars of below-average quality, so the buyer’s bid will drop to 15. The reaction of the car owners is to withdraw the car with a quality higher than 15 yuan from the market again.By analogy, the number of "good cars" on the market will become less and less, which will eventually lead to the collapse of this second-hand car market.Here, what people usually make is "adverse selection", which occurs because of information asymmetry.

In a market with asymmetric information, because the seller of the product has more information about the quality of the product than the buyer, in extreme cases, the market will stop shrinking and disappear, which is the adverse selection in information economics.The lemon market effect means that in the case of information asymmetry, good products are often eliminated, and inferior products will gradually occupy the market, thereby replacing good products, resulting in inferior products in the market.Normally, if the price of a commodity is lowered, the demand for that commodity will increase; if the price of a commodity is raised, the quantity of that commodity supplied will increase.However, due to incomplete information and opportunistic behavior, sometimes consumers will not make the choice to increase purchases when the price of goods is lowered, and producers will not increase supply when prices are raised.Therefore, it is called "adverse selection".

The existence of transaction costs in financial markets explains why the role of financial intermediaries and indirect financing is important.Another reason is that in financial markets, one party to a transaction does not know enough about the other to make correct decisions.

Suppose you might make loans to your two aunts.The eldest aunt is conservative, and she will only borrow money when she confirms that the investment project is solvent.The second aunt, on the other hand, used to gamble and was very interested in a get-rich-quick project in which she could become a millionaire if she received $1000 to invest in it.However, as with most get-rich-quick schemes, the investment could go nowhere, and Second Aunt would lose the $1000.

So which aunt is most likely to borrow money from you?Of course it is the second aunt.Because if the project is successful, she could make a fortune.However, on your part, you don't want to lend her a loan because she can't repay your loan if the project fails.

If you know your two aunts very well, that is to say, the information between you is symmetrical, then there will be no problem.Because you know that the second aunt's risk is quite high, and you will not lend her money.But since you don't know your two aunts very well, and the second aunt treats you hard, you are likely to give the loan to the second aunt instead of the eldest aunt.That is, due to adverse selection, you might decide to refuse a loan from any of your aunts, even though the eldest aunt desperately needs the loan to invest in a viable project, and her credit risk is fairly low.

The problems that lack of information creates for the financial system exist in two phases: pre-trade and post-trade.

Before the transaction, the problem caused by information asymmetry is adverse selection.Adverse selection in financial markets means that those potential lenders who are most likely to cause adverse consequences, that is, credit risk, are often those who most actively seek loans and are most likely to obtain loans.Lenders may decide not to make any loans due to adverse selection making the loans potentially incur credit risk, even though options with little credit risk exist in financial markets.

(End of this chapter)