How Money Markets Operate Essay

How Money Markets Operate? Essay

Money markets refer to a subsection of the fixed-income industry where short-term financial instruments of high liquidity are sold and bought. The money market includes several short-term trading instruments such as commercial papers, treasury bills, and bankers’ acceptances. The main purpose of any money market is to fill the void in any economy’s short-term credit needs. Nevertheless, the money market differs from the capital market because most of the former’s instruments mature after only a short time.

The money market is not limited to physical currency trading but it also encompasses trade in other short-term instruments that are either sold in wholesale or retail terms. For example, in most countries money market occur in terms of commercial papers and treasury bills among other non-currency tools. The overall goal of money markets is “to facilitate the efficient transfer of short-term funds between holders and borrowers of cash assets”1.

This paper aims to assess money markets as well as how they operate including their context within international economies. Money markets developed to their current states when it became clear that money was a major tool in the global financial system2. Currently, most money market instruments have a maturity period that is less than one year. Although, money markets are often confused with bond markets, the latter is distinguished by its short maturity periods.

In the global context, money markets are part of vast and distinguished international monetary systems. All economies around the world use money markets to fulfill their short-term lending and borrowing needs. Money markets were a replacement for commodity markets that were fairly common in the previous centuries. Gold is still a preferred trading commodity in modern markets and it is also one of the earliest.

For example, in the 1600s France had the biggest gold reserve for trading purposes in the whole of Europe3. Maintaining a balance in the money markets can determine the fate of an entire economy. Furthermore, only free markets have shown the resilience that is necessary to accompany the fluctuations in demand and supply of the money markets. After the Dutch economy collapsed in the late 1700s due to demand and supply uncertainties, the government took charge whilst upholding the spirit of the free market4.

Capital markets serve a purpose that goes beyond the short-term lending and borrowing needs. Furthermore, individuals rarely feature in the money markets although they are well represented in the capital markets. Large economies have subsequently big money markets and vice versa. The demand and supply of money market instruments is subject to normal market forces. It is also important to note that money markets are part of both capitalist and socialist systems. Nevertheless, their modes or regulation and presentation in these two systems are different.

Access to money markets in various economies around the world is limited to local institutions. The use of middlemen in these markets is also common especially in capitalist economies. Other than economic players, money markets are also subject to political influences. Political stability is synonymous with health money market environments and vice versa. All governments endeavor to use their money markets to create harmonious investment tools that can bring together financial institutions, citizens, and government policies.

The main distinction of money markets is their short-term assets. These assets can be bought or sold and have a maturity period that can range from twenty-four hours to one year. Furthermore, all these instruments of exchange can be easily converted into cash-based currencies at the convenience of their holders. All money markets have ready facilitation/disposals for “bank accounts, certificates of deposit, interbank loans, money market mutual funds, commercial paper, treasury bills, repurchase agreements, and securities lending”5.

In modern economies, the money markets make up a significant share of the entire financial system. For instance, money markets account for at least thirty-five percent of the entire United States’ economy according to recent statistics. The only unique factor about most money market instruments is their maturity periods. In addition, most of these instruments are issued under different sets of guidelines and regulations.

Fannie Mae and Freddie Mac are two institutions that are tasked with the distribution of money market securities. However, these two institutions operate under regulations that seek to oversee the best interests of both the government and the populous. In 2008, the interests of the money market consumers were overlooked when Freddie Mac and Fannie Mae gave subprime mortgage money to retail banks and who in turn made quick and cheap loans to people to finance homes without telling them that interest was going to go up quickly as a result”6.

Current Face Sales During Month
30-Year
Fannie Mae Freddie Mac Sum
4.0% 0 0 0
4.5% 561,759,446 649,388,130 1,211,147,576
5.0% 760,375,883 623,976,813 1,384,352,696
5.5% 712,553,619 718,436,139 1,430,989,758
6.0% 621,340,577 192,163,715 813,504,292
6.5% 4,278,471 0 4,278,471
Subtotal 2,660,307,996 2,183,964,797 4,844,272,793
15-Year
Fannie Mae Freddie Mac Sum
4.0% 0 0 0
4.5% 0 0 0
5.0% 0 0 0
5.5% 27,163,193 88,074,049 115,237,241
6.0% 0 0 0
6.5% 0 0 0
Subtotal 27,163,193 88,074,049 115,237,241
Grand Total 2,687,471,189 2,272,038,846 4,959,510,034

Fig 1. Table showing trends of March 2012 sales of short-term securities over periods of fifteen years and thirty years7. The trade indicates the interest rates of most securities remain stagnant over the short-term and keep adjusting over the long-term.

Money markets are universal and they can be found in any country across the world. In socialist economies, there are limitations to the diversity of money market instruments. For instance, both Singapore and Qatar have money market instruments8. However, as a capitalist hub Singapore offers a wide range of market instruments than Qatar, which is a socialist economy. Nevertheless, it is important to note that both of these countries have similar economic dynamics.

Liberal markets are the hallmark of money markets because economic policy makers rely on them to effect the distribution of funds to the parties that need it at any given times. In lecture 1 on “Origins of a Political Economy”, it is noted that President Roosevelt used the money market skills of Lord Keynes to save America from slipping into another financial depression. Keynes advised Roosevelt to “to pump money into states and regional government…and once states and regional governments had access to that revenue money, it became their responsibility to create banks”9. Banks are important agents in money markets and they can use the instruments of this trade to stimulate growth in any section of the economy.

Commercial banks are the main facilitators of money markets. Most money market instruments are distributed through the commercial-bank networks. Consequently, in any given country commercial banks act as suppliers and consumers of money market products. The market dynamics that are subject to the operations of commercial banks are expected to create a viable balance in this market. First, commercial banks are surcharged with the distribution and collection of currency.

This process often relies on the millions of citizen-operated checking accounts that are held through various commercial banks. These accounts are responsible for movement of market instruments from wholesalers to retailers and then to individuals who act as consumers. In instances where money markets prove hard to regulate, commercial banks are often used by governments to correct any imbalances. In the history of the United States, commercial banks have been used to correct money markets. For example, in the Lectures on “Political Economies” we encountered incidences where both Franklin Roosevelt and Bill Clinton influenced money market dynamics during their presidencies10.

Another main participant in the money-market field is the central bank. Central banks act as the regulators of commercial banks in any country11. Consequently, central banks have a huge stake in the control of money markets as well. In liberal economies, central banks act as overall bankers for the commercial banks as the latter deposits their money into these organizations12. On the other hand, central banks hold cash reserves on behalf of countries and their financial institutions. In regards to money markets, central banks have the ability to issue out these reserves to financial institutions if a need for them arises.

International money markets are often subject to the control of central banks. These institutions act as gateways to all international monetary transactions as well as rates of exchange. One of the purposes of the monetary reserves that are held within central banks is to ensure that the demand for national currencies does not outstrip supply at any given time. To correct these monetary imbalances, central banks sometimes use other forms of exchange such as gold standards.

In addition, globally accepted currencies such as the Euro and the dollar are a common fixture in the international money markets. It is important to note that the currency exchange markets are subject to both internal and external factors. For example, if a country produces less than average it often relies on imports. Consequently, the country’s currency will be less valuable if other countries are not interested in its domestic products.

There are various categories of money market instruments and they are all aimed to satisfy certain market segments. Bank deposits make up the majority of the market but they are only considered as legitimate instruments when ‘certificates of deposit’ are issued along with them. Bank deposits are mainly influenced by an institution’s creditworthiness or government’s policies in regards to these instruments. At times banks receive loans from other banks and this scenario creates another form of money markets.

Commercial paper is another form of money market instrument and it acts as an acknowledgement of any debt that is unsecured. Only large and reputable organizations are in a position to trade in commercial paper13. The creditworthiness of any financial organization is subject close scrutiny when it is offering these promissory notes. Treasury bills are among the most common money market instruments. Treasury bills are often given out by governments and their maturity periods range from a month to a year.

The buying and selling of treasury bills is subject to a fixed interest rate. In modern economies, treasury bills are also issued electronically and traded as such. Repos represent a late entrant into the money market and they are characterized by their relatively short maturity periods. Repos are issued on “short-term basis…usually no more than two weeks…where a borrower sells a security it owns for cash and agrees to buy it back from the purchaser at an agreed time and with interest”14.

Money markets are characterized by their trade in short-term securities that have maturity periods of less than twelve months. The money market instruments are subject to short-term factors and this minimizes their risk by a significant margin. The main actors in the money markets are commercial banks, central banks, governments, individuals, and other financial institutions. Political climates have a lot of influence on money markets. Most money market instruments are reliant on the creditworthiness of the institutions that issue them. Money markets are continually evolving in line with the needs of the population.

4 WEEKS 13 WEEKS 26 WEEKS 52 WEEKS
DATE BANK DISCOUNT COUPON EQUIVALENT BANK DISCOUNT COUPON EQUIVALENT BANK DISCOUNT COUPON EQUIVALENT BANK DISCOUNT COUPON EQUIVALENT
03/01/16 0.29 0.29 0.33 0.33 0.49 0.50 0.67 0.68
03/02/16 0.27 0.27 0.35 0.36 0.47 0.48 0.66 0.67
03/03/16 0.25 0.25 0.27 0.27 0.45 0.46 0.64 0.65

Fig 1. Table showing daily Treasury bill rates data15

The table above indicates the yield rates of treasury bills that have different maturity levels. It is important to note that although the treasury bills are issued exclusively by the United States Treasury Department, they can be sold as various money market instruments. Consequently, “The ‘Bank Discount’ rate is the rate at which a Bill is quoted in the secondary market and is based on the par value…and the Coupon Equivalent, also called the Bond Equivalent, or the Investment Yield, is the bill’s yield based on the purchase price”16. It is also evident that instruments with shorter maturity rates (4 weeks) yield lower returns than those with higher ones.

Reference List

Amico, Stefania. “The Federal Reserve’s Large‐scale Asset Purchase Programmes: Rationale and Effects.” The Economic Journal 122, no. 564 (2012): 415-446.

Balaam, David. Introduction to International Political Economy. Upper Saddle River, NJ: Prentice Hall, 2012.

Department of Treasury. “Resource Centre.” Open Government. 2015. Web.

Ehrmann, Michael and Marcel Fratzscher. “Monetary Policy Announcements and Money Markets: A Transatlantic Perspective.” International Finance 6, no. 3 (2003): 309-328.

Goodfriend, Marvin. “Monetary mystique: Secrecy and Central Banking.” Journal of Monetary Economics 17, no. 1 (2006): 63-92.

Lecturer’s Last Name, First Name. “Political Economic Notes.” Lectures, 2015.

McKinnon, Ronald. Money and Capital in Economic Development. New York: Brookings Institution Press, 2013.

Melvin, Michael. International Money and Finance. London: Academic Press, 2012.

Essay 2 World Trade Organization

The World Trade Organization (WTO) is an entity that is focused on harmonizing free trade across the world. The organization’s main agenda is to address the misgivings of the international trade where some countries have continuously dominated at the expense of others. The WTO is a product of another pioneering organization that was known as the General Agreement on Tariffs and Trade (GATT). WTO became a fully-fledged organization in 1995 after months of negotiations that culminated in the now famous “Uruguay Round of Talks”17.

The main difference between WTO and its successor GATT is that the former has a more global outlook and its main aim is to influence and not to regulate. During its formation, the WTO was meant to bring down the various trade barriers that dominated international trading especially the disparities between the developing and developed nations. Since its inception, observers have questioned the success that the WTO has had in facilitating free trade across the world.

Skeptics have pointed out that some influential players in the international trade have been using the organization to further their own (sometimes selfish) agendas. This paper focuses on the WTO and its performance record in regards to facilitating international trade.

The essay will highlight the initial goals of the organization as well as areas where it has had a positive impact. Furthermore, the paper will outline both past and future challenges in regards to the institutional goals of the WTO. The WTO has influence in almost all areas of modern economies including commodity markets, movement of agricultural products, trade in intellectual property, and monetary markets among others. Overall, this essay will focus on the institution of WTO from all angles with respect to the current conditions of the global trading environments.

The impact of migration on trade, principal studies.
Table 1: The impact of migration on trade, principal studies.

This table is an example of vital data that is compiled by the WTO on a provisional basis. Source Journal of Economic History18.

The institution of the WTO is subject to various internal and external influences. The WTO has only been in existence for slightly over two decades and this makes the organization relatively young. The creation of the organization was subject to three key areas of influence. The first area involved turning the previous GATT into an organization that can facilitate formal talks in relation to global trade. The other main interest in the formulation of the WTO was to ensure that the body could oversee expansions of the global trade through various interceptions such as “implementation of commitments, provision of training, technical assistance, and dissemination of information based on research activities”19.

The WTO was also formulated with the view of turning it into a platform through which countries and other trading entities could resolve their disputes. Incidentally, this creation purpose is the subject of divided opinions in regards to WTO. For instance, some feel that WTO is not a just dispute-resolution mechanism because it often favors the interests of big corporations. From the outset, it is clear that the complexities of global trade in the 21st century have been too complex for the original institution of the WTO. Consequently, there is need to update the organization in order to make it relevant to the modern international trade environment.

Nevertheless, the organization has managed to stamp its authority in various international trade disputes in the course of its twenty years of existence. Furthermore, the organization has continued to gain more relevance as a tool for disseminating vital global trade statistics. Currently, the most important aspect of existence for WTO is to ensure that there is a balance between its rule making and rule enforcing agendas.

Most global organizations are formulated on distinct principles that are aimed at propagating important agendas. The WTO is based on certain important principles that are set to benefit the entire international trade fraternity. The main principle behind the formulation of the organization is a strict non-discrimination policy in regards to international trading. There are various unfair practices that dominated the international trade from the 1950s to the 1980s20.

The WTO sought to eliminate the discriminatory policies that were mainly propagated by the developed countries at the expense of poor developing and resource-rich nations. Within the policy of non-discrimination, countries are expected to treat all traders in the same manner whether they are locally or nationally affiliated. Since the WTO was formed in 1995, it has had a notable level of success in some areas of its operations21. The organization has remained true to its purpose of ensuring free trade. This section of the essay highlights areas where the WTO has made positive contributions. First, the WTO has not only enhanced the value and quantity of trade but has also helped in eradicating trade and non – trade barriers.

Prior to the formation of the WTO, countries would form trade barriers just to protect their interests. In other scenarios, countries would form trade barriers that were aligned to political affiliations. The WTO has been instrumental in bringing down unfounded trade barriers. Furthermore, countries are reluctant to institute malicious trade barriers in anticipation of showdowns with the trade organization. The organization has also succeeded in widening the scope of its operations from commodity-based trade to trade in services, intellectual property, and financial services.

Initially, the WTO was meant to be a more significant version of its predecessor GATT. A closer analysis of the organization indicates that it has been successful in furthering GATT’s overall agendas. For instance, the trade organization has introduced the annual World Trade Report and the Trade Policy Review, both of which have had a significant impact on international trade practices22. Another area of success for WTO is that the organization has been at the forefront when it comes to sustainable global trade. Without the organization’s dispute resolution mechanism, some disagreements would slow down the rates of global trade considerably.

The WTO has also failed to deliver on some of its outlined agendas. For instance, the organization has been observed to have no regards for environmental and labor laws when it is formulating its policies. Furthermore, the organization has been advancing the capitalist agenda without making necessary considerations on this issue23. For example, the privatization of vital services such as health education is not always beneficial to the masses. Another area where the WTO has failed in great proportions is in adjudicating trade disputes that involve intellectual property. On one side, the WTO encourages developed countries to withhold technology from poor countries. On the other hand, the organization is unable to curb instances where developed countries ‘steal/hijack’ any unique intellectual property from poor countries24.

Table 2. Imports by country, 2006-2011. (US$ million and per cent).

Description 2006 2007 2008 2009 2010 2011
Total imports 234.1 285.5 293.1 251.0 276.1 251.2
(Per cent)
America 2.7 3.5 2.7 4.2 5.4 3.8
USA 1.9 2.5 1.9 2.5 3.8 2.4
Canada 0.5 0.7 0.6 1.3 0.9 1.2
Other America 0.3 0.3 0.3 0.5 0.8 0.2
Europe 44.6 39.7 38.0 36.5 35.6 29.1
EU (15) 41.9 37.4 35.4 34.1 34.3 27.8
Belgium – Luxembourg 17.3 17.3 19.1 21.5 20.1 13.2
Germany 5.5 5.5 3.8 3.7 2.4 2.9
United Kingdom 2.7 2.4 1.6 1.3 2.9 2.6
France 3.8 2.8 2.5 2.1 2.2 2.6
Netherlands 3.3 2.6 2.5 2.4 2.7 2.3
Denmark 3.5 3.1 1.4 0.9 0.7 2.3
Italy 3.9 1.7 3.4 1.5 2.7 1.2
EFTA 2.3 1.9 1.6 1.4 0.6 0.6
Eastern Europe 0.2 0.3 0.6 0.7 0.6 0.4
Former USSR 0.1 0.2 0.1 0.0 0.5 0.3
Other Europe 0.1 0.1 0.4 0.2 0.2 0.3
Asia 16.0 17.5 17.1 21.5 21.7 22.5
Middle East 6.9 6.7 7.1 8.9 9.8 10.6
United Arab Emirates 6.2 6.1 5.9 7.2 7.0 8.8
Israel 0.4 0.4 0.7 0.5 1.7 1.1
Far East 7.4 8.8 8.0 10.2 9.1 8.4
Japan 3.2 4.3 4.3 4.8 2.6 2.6
China 0.8 0.9 0.5 1.2 2.3 2.0
Indonesia 0.1 0.3 0.3 0.4 0.3 0.7
South Asia 1.6 2.0 2.1 2.4 2.8 3.6
India 1.5 1.7 1.8 1.9 2.3 2.7
Pakistan 0.1 0.3 0.3 0.5 0.4 0.8
Oceania 0.0 0.1 0.5 0.2 0.2 0.1
Africa 36.8 39.1 41.7 37.6 37.0 44.6
Sub-Saharan Africa 35.5 37.0 37.8 34.1 31.6 39.8
Kenya 18.0 22.6 24.5 21.8 22.4 26.6
Tanzania 5.6 5.5 4.9 5.7 3.5 5.2
Uganda 5.3 5.7 4.4 3.8 2.9 4.4
Mauritius 0.5 0.3 0.4 0.4 0.6 1.0
Zambia 0.5 0.8 0.4 0.8 1.2 0.9
Other Africa 1.2 2.1 3.9 3.5 5.4 4.8
South Africa 0.0 0.0 0.0 0.0 4.5 4.4
Other 0.0 0.0 0.0 0.0 0.0 0.0

Source: WTO Secretariat calculations, based on data from the Comtrade database, United Nations Statistics Division (UNSD) (Standard International Trade Classification, SITC, Rev. 3)25.

Moving forward, the WTO is set to encounter various challenges as it seeks to make its presence felt in the international trade arena. First, the organization will continue to operate in an environment where power politics can derail any sound agendas. It is important to note that even though most organizations and countries expect WTO to oversee fair trade, they also expect to be favored by this organization. Furthermore, the WTO operates in a different reality than the one under which its ideologies are formulated.

Another future challenge for the WTO is that the organization has to navigate through an environment of inequality that has been created by national and regional legislations. For example, human rights and environmental laws continue to interfere with WTO’s agenda of harmonizing international trade. There is a chance that some stakeholders of the WTO have realized that it is possible to use these laws to undermine the spirit of free trade.

The decision-making abilities of the WTO are subject to various stakeholders and regions. Consequently, the organization has to contend with a slow decision making process. In future, the trade organization should consider changing some of its structures with the view of quickening its decision-making structures. Agriculture and textile industries are some of the areas that are subject to unfair international trade26. The WTO should find a way of harnessing these areas of operations.

The WTO is not a new type of organization in respect to global trade but its agendas are new. The organization came in with the promise of fair trade but this vision is yet to be realized across the international trade horizons. Nevertheless, the organization has had considerable success in some areas while others have lagged behind. On a closer analysis, the interface between the international stakeholders and the WTO has lacked the symbiosis that was initially meant to drive the memo of free trade.

Reference List

Barfield, Claude. “Free Trade, Sovereignty, Democracy: Future of the World Trade Organization.” Chinese International 2, no.1 (2011): 403-413.

Correa, Carlos. Intellectual Property Rights, the WTO and Developing Countries: the TRIPS Agreement and Policy Options. Boston: Zed books, 2000.

Dunlevy, James and William Hutchinson. “The Impact of Immigration on American Import Trade in he Late Nineteenth And Early Twentieth Centuries.” The Journal of Economic History 59, no. 4 (2009): 1043-1062.

Lecturer’s Last Name, First Name. “Political Economic Notes.” Lectures, 2015.

Oatley, Thomas. International Political Economy. New York: Routledge, 2015.

Piermartini, Roberta. The Role of Export Taxes in the Field of Primary Commodities. Cambridge: Cambridge University Press WTO Discussion Paper, 2004.

Subramanian, Arvind and Shang-Jin Wei. “The WTO Promotes Trade, Strongly but Unevenly.” Journal of International Economics 72, no. 1 (2007): 151-175.

WTO. “World Trade Report.” World Trade Organization. 2015. Web.

World Trade Organization. The Legal Texts: The Results Of The Uruguay Round Of Multilateral Trade Negotiations. Cambridge: Cambridge University Press, 2009.

Footnotes

  1. Michael Melvin, International Money and Finance (London: Academic Press, 2012), 17.
  2. Lecturer’s First Name Last Name, “Political Economic Notes” (Lectures, 2015).
  3. Lecturer’s First Name Last Name, “Political Economic Notes” (Lectures, 2015).
  4. Lecturer’s Last Name, “Political Economic Notes”.
  5. Lecturer’s First Name Last Name, “Political Economic Notes” (Lectures, 2015).
  6. Lecturer’s Last Name, “Political Economic Notes”.
  7. Stefania Amico, “The Federal Reserve’s Large‐scale Asset Purchase Programmes: Rationale and Effects,” The Economic Journal 122, no. 564 (2012): 426.
  8. Lecturer’s First Name Last Name, “Political Economic Notes” (Lectures, 2015).
  9. Lecturer’s Last Name, “Political Economic Notes”.
  10. Lecturer’s First Name Last Name, “Political Economic Notes” (Lectures,2015).
  11. Michael Ehrmann and Marcel Fratzscher, “Monetary Policy Announcements and Money Markets: A Transatlantic Perspective,” International Finance 6, no. 3 (2003): 310.
  12. Marvin Goodfriend, “Monetary mystique: Secrecy and Central Banking,” Journal of Monetary Economics 17, no. 1 (2006): 69.
  13. Ronald McKinnon, Money and Capital in Economic Development (New York: Brookings Institution Press, 2013), 59.
  14. David Balaam, Introduction to International Political Economy (Upper Saddle River, NJ: Prentice Hall, 2012), 43.
  15. Department of Treasury, “Resource Centre,” Open Government. Web.
  16. Department of Treasury, “Resource Centre,”.
  17. Arvind Subramanian and Shang-Jin Wei, “The WTO Promotes Trade, Strongly but Unevenly,” Journal of International Economics 72, no. 1 (2007): 153.
  18. James Dunlevy and William Hutchinson, “The Impact of Immigration on American Import Trade In the Late Nineteenth and Early Twentieth Centuries,” The Journal of Economic History 59, no. 4 (2009): 1049.
  19. Lecturer’s First Name Last Name, “Political Economic Notes” (Lectures, 2015).
  20. Lecturer’s First Name Last Name, “Political Economic Notes” (Lectures, 2015).
  21. Roberta Piermartini, The Role of Export Taxes in the Field of Primary Commodities (Cambridge: Cambridge University Press WTO Discussion Paper, 2004), 3.
  22. Carlos Correa, Intellectual Property Rights, the WTO and Developing Countries: the TRIPS Agreement and Policy Options (Boston: Zed books, 2000), 19.
  23. Thomas Oatley, International Political Economy (New York: Routledge, 2015), 84.
  24. Claude Barfield, “Free Trade, Sovereignty, Democracy: Future of the World Trade Organization,” Chinese International 2, no.1 (2011): 404.
  25. WTO, “World Trade Report,” World Trade Organization. Web.
  26. World Trade Organization, The Legal Texts: The Results Of The Uruguay Round Of Multilateral Trade Negotiations (Cambridge: Cambridge University Press, 2009), 39.

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