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The super-corporate pinball wizards

United Kingdom

It’s like playing pinball with the economy. Photo: zieak, under a CC License.

‘Experts’ are warning of the next impending financial crisis – an explosion in the corporate bond market. It’s all a bit scary.

The corporate bond market is worth £250 billion ($400 billion). It has become very popular because it’s seen as a safe haven (for money). Countries are not quite as safe as they used to be, so instead people have been buying into big corporates. Now, this next point is the really scary bit: 40 per cent of assets in the corporate bond market are owned by just five large funds. Five. That means there are five boards of fund management institutions that own 40 per cent of the whole corporate bond market. That’s, let’s say, 50 people. Thirty per cent is owned by just three.

For a while there has been an emergence of ‘super-corporates’ such as the one created in November 2012 when corporate giants Glencore and Xstrata finally concluded a deal to form a super-corporate in control of huge chunks of the mining and commodities market.

Super-corporates control vast empires, which in turn control huge chunks of, for example, the supply of electricity, and because they control so much they dictate to governments what they should do, and of course that infringes upon people’s economic and democratic rights.

These guys are referred to as the ‘super-funds’. Their issue is that, with so many people buying into corporate bond funds, if someone wants out of the fund (this is called ‘redeeming’ their position) then there is no way that the fund will be able to pay them out of the game. As fund holders realize this, there will be a run on the fund in the same way there is a run on a bank if a bank says it’s running out of money. Think Northern Rock. In this instance, it will be other funds, or other corporates or governments who will lose.

What happens next? We see an implosion of the market, values plummet and investors in those funds lose a lot of money. And if they can’t get their money back or they get only a small proportion of what they put in the fund in the first place, that’s going to create some big cash flow problems which they will only be able to solve by borrowing to cover the shortfall. Who’s going to lend them the money? Well, the last time that kind of thing happened, we did!

But I don’t even know if the money-printing presses can run fast enough to bail out the whole corporate bond market. Four hundred billion dollars may not sound much compared to the bank bail-out figures, but it is still a lot. It’s likely that huge global sovereign funds from the Middle- and Far East would then ‘rescue’ the funds and take ownership of their contents and so we see the borders of the new economic world order being defined. So if the banks didn’t precipitate the creation of a new economic order with the 2007-08 banking collapse, here, created by the banks, is another fillip to the mechanism of change in economic power and ownership.

Yet again the financial sector puts at risk the lives of millions and the mainstream of society is merely a function of the fast-changing winds and volcanoes that erupt at the faultlines of clashing market forces. Not a second to pause as the mainstream of society is bounced continually around the pinball machine. Bing! Bing! Bing….

The only solution is for society at large to isolate itself from these dangers in order to lessen the significance of these dangers in daily life. Governments need to shift their allegiances towards the vast majority they supposedly represent, or the pinball game will never end.

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