Financial Speculation and Stock Market Crashes

Aug 19, 2024

On Monday, August 5, stock markets crashed around the world. Over six trillion dollars in financial holdings evaporated into thin air. But within a matter of days, the stock markets recovered, almost like nothing had happened.

These wild gyrations demonstrated the complete instability of the financial system.

Big financial companies bankroll hundreds of billions of dollars’ worth of bets in virtually every corner of the world. They bet big on the value of the Japanese yen. They make complex wagers on cryptocurrencies, like bitcoin. They pile into the stocks of hot tech companies.

To super-charge their profits, these companies borrow huge amounts of money, or as they call it, “leverage.” So, as stock markets rose through the first half of 2024, these bets generated windfall profits. This inspired copycat traders to get on board and pushed prices higher.

But betting with borrowed money is very risky. When bets go bad, the borrowed money multiplies losses. To cover their losses, financial companies are forced to sell big amounts of stocks and bonds all at once. This sets off a chain reaction of forced sales. In the age of super-fast computers and networks, these losses can grow at practically the speed of light, threatening to destabilize and bring down the entire global economy.

For several years, financial companies all over the world had been borrowing insane amounts of Japanese yen to finance speculation of all kinds. What made the yen so attractive was that the interest rates in Japan were super low, practically zero. Borrowing money at super-low interest rates was a sure-fire recipe for easy profits: Just borrow in Japan, then plow all that free money into Mexican bonds yielding over 18%, or big tech companies’ soaring shares or even Bitcoin. It is an old speculator’s trick that is called the carry trade.

Nobody knows how much yen were borrowed to make those bets. But estimates run in the tens of trillions of dollars’ worth of Japanese yen.

All that borrowed money was like a time bomb.

On August 3^rd, the fuse was lit. Faced with rising inflation, the Japanese central bank raised interest rates by a tiny amount, one-quarter of one percent. Fearing bigger increases in the near future, financial companies unwound their bets based on trillions of dollars’ worth of borrowed yen … all at the same time!

By Monday, August 5, stock markets crashed worldwide. Losses rippled through Asian markets and into Europe, where major stock indexes slumped, and then into the Americas. High-flying shares in technology companies were wrecked. The crypto market was hit by billions in forced sales.

Nobody knew how far this crash would go. Bloomberg News’ August 5^th headline was: “$6.4 Trillion Stock Wipeout Has Traders Fearing ‘Great Unwind’ Is Just Starting.”

This time, the crash did not continue. The Japanese central bank issued assurances that it would not raise interest rates any further, despite rising inflation. Hedge funds snapped up shares of stocks at what appeared to be bargain prices. Financial markets recovered.

So, the rampant speculation that had resulted in the financial crash started up all over again, guaranteeing that there will be new crashes, even much bigger crashes that could finally set off “The Great Unwind” that ushers in a new, much worse economic depression that everyone knows lurks in the future.

This is the insanity of a huge economic system, that ties humanity together, but that is run solely for the profit of a tiny, tiny minority of capitalist owners. Those capitalists are in constant competition with each other to make more profits in the shortest time possible. In their quest for ever higher profits, they are ready to gamble away and destroy all the wealth created by the working masses worldwide.

This can only change when the working masses, that is, the people who actually do the work and produce everything, take control away from that tiny minority of predatory capitalists, and run the society in the interest of all of humanity.