Capitalist financiers make a lot of money because they fix things on the spot.
It is important to understand that while the daily, $5 trillion FX market is an aggregate dimension of the risk being managed, it is not a bank. Nevertheless, in the aggregate, it operates like a bank. It is so big that all the parts of the story are anonymously written so that it’s hard to tell who writes the script that authors the risk.
This is really important because in a free market the real risk, though having the anonymous, aggregate dimension of real and immediate accountability, the parts are not too big to fail, which is the source of the risk.
Understand that the free-market model is not the republican form of governance. It is pure, “BIG-D” Democracy. It is application of the risk from the bottom up, which conservatives say does not conform to objective reality. That is why they are always working real hard, being paid a lot of money, to fix it.
Big bankers make a lot of money fixing things for the capitalists. (Like Phil Gramm famously said many times in the Senate about transfer payments, “We are sick and tired of other people living off our money!”) They fix it so the risk naturally flows from the top down (which always has the probable effect conservatives say they want to avoid).
The fixers are paid highly visible, princely sums. They operate, however, with a great deal of anonymity in “dark markets” referred to as “the shadow banking system” which includes the most liquid derivative market in the world, the FX spot market, where they can fix things (the rate of ex-change) on the spot to “make” a profit, and earn the pay of a princely sum.
Using what are known as “fixes,” the fixers spot the market with relative value. Immediately there is an ambiguity that derives from the root of two things moving against each other over time to yield a current value (having a causal attribution), which are “currencies” at the rate of ex-change. Just like in the theory of electro-magnetism, the dynamic dualism produces a useful value described as currency, which is used to buy and sell things with relative value, determined on the spot at the current rate.
For example, to eliminate the risk of change at the root (to ex-change its relative value), oil is traded in US dollars. Called “petro dollars” the rate of exchange can be affected, nevertheless, by rig counts, production quotas, and excess capacity that can be, in themselves, highly ambiguous. This causes an arbitrage argument which, if you want to buy oil, must be arbitrated on the spot, which depends on the value of a dollar.
(The root of the value then, notice, is a lot more than just two possible variables, which complicates the factorial sequence described as the risk. Nevertheless, the added identity is useful. It has currency. It is used to create a story about what causes the risk of change–a logical argument that justifies the fully assumed risk of loss, which is what the arbitrage argument is all about–measuring the probable risk in the futures using the price now, at current, useful value.)
The dollar is currently strong, which measures the current weakness of oil prices; but remember, correlation (measuring the effects, like Isaac Newton said) does not prove causation.
Causing the Rate of Change
The fixers fix it so things can change in a millisecond. Ironically, however, the fix is in so that nothing actually changes at all, which effectively conserves the measurable risk-value over time.
The price of oil, for example, is often referred to as being caused by the value of the dollar. While it measures relative strength it does not identify a cause. Apparently, however, there is some useful value in making it worth believing.
What causes the strong dollar AND weak oil prices is deflation. So, there is a fundamental error of attribution. Instead of the value of the dollar affecting oil prices like the experts keep telling us, the price of oil was used to deflate the economy, which has the effect of strengthening the dollar’s rate of ex-change, effectively measured by the price of oil. That’s why it is incorrect to say falling oil prices indicate economic recovery.
Since falling oil is caused by falling demand, it actually indicates a continuing deflationary trend–and the fix is in!