The Mechanisms of Money and the Risks of the Financial World

In today’s world of financial markets, there are a variety of methods to increase money based on seemingly simple principles, but are extremely complex in execution. One of these methods is the so-called levering, in which one’s own return can be significantly increased by skilfully using borrowed capital. So-called promissory notes and good ones are usedRelationships with financial institutions to multiply your own capital and thus increase your own chance of winning. A speculator who wants to increase his wealth in this way requires a considerable amount of money to be able to do the desired business. A close friend of the speculator who has excellent contacts with a bank, acts as a mediator in this scenarioby signing promissory notes worth a total of 10,000 euros and handing them over to the speculator as security. Before that, this friend has already taken out a loan of 10,000 euros from the bank to ensure security. This money is now passed on to the speculators by the friend, who uses it for his speculative business.

The principle of leverage: promissory notes as security

Thanks to the good relationships between the friend and the bank, he is able to provide the promissory notes with a 70 percent degree of mortgage. This means that the bank grants him a loan of 70 percent, i.e. 7,000 euros, on the value of the promissory notes. This amount is in turn passed on to the speculators who use the money in his business. The promissory notes stick to itin the balance sheet of the friend who increases his balance sheet total and at the same time takes advantage of the bank’s loan. The fresh money, which is passed on by the friend to the speculators, serves the next round: New promissory notes will be issued, which will also be enfeoffed with 70 percent. This means that additional funds of around 4,900 euros are being created, which in turnfriend flow and expand their balance sheet total. With this approach, the speculator can access the existing capital again and make new business, which in turn is supplemented by the same method. Through this repeated mortgage and disclosure, the entire amount of money created is constantly increasing in the friend’s balance sheet. Overall, it can be stated thatthis procedure is created in the sample calculation a sum of 21,900 euros in capital, although originally only 10,000 euros were invested. This principle can generally be continued at will, provided there is a bank ready to take part in this game and to support the mortgage lending process.

The influence of the central bank and the risk of levering in a large scale

The European Central Bank could also support the effect of levering on a large scale through its measures. By supplying money to the so-called rescue package, she can use a strategy similar to that of the bank in the example described. This means that by providing liquidity in a targeted manner, it could strongly affect the financial mechanisms in the states and in the banksheat up and thus increase the supply of liquidity. This approach is the simplest form of leverage, whereby adding borrowed capital multiplies the effect on the total of the available funds. In addition, there are numerous other variants of leverage, which are summarized under the term leverage. The lever is a central element in theso-called derivatives, the complex financial instruments that have become increasingly important in recent decades. The aim is to make big profits with comparatively low capital investment, but this strategy is not only upwards, but also downwards extremely risky, since losses can also be increased.

Political challenges and the risks of leverage in financial policy

The policymakers’ considerations and discussions in 2011 regarding the support of the euro countries by the rescue package illustrate the great uncertainty and the extreme challenges facing those responsible. It became clear that the volume of several hundred billion euros provided may not be sufficient toto stabilize states permanently. In order to further increase liquidity, the idea of buying bonds and at the same time introducing a kind of insurance was discussed, in which only part of the risk is taken over in the event of a default. These considerations aim to significantly multiply the volume of the rescue package in order to cover the need. It turns out that in theFinance world Only money counts, which basically has no real substance, but can be increased again and again through creative methods and targeted levering. The main focus is on power and influence: Who gets access to the funds and who is left out? These questions are of central importance in today’s prevailing financial order.

Hedge Fund: The Rules of the Game of Speculation

On a certain day, a company’s shares close at a price of 24.65 euros and open the next day at 23.85 euros. A layman might think that if the price is falling, it makes sense to sell the stock. However, a hedge fund manager would pursue a different strategy. He would probably buy in this case, since he’s the so-called Gap down as a buy signalinterpreted. This gap describes the price gap that arises on one day and is usually closed again in the course of the next day. For the manager, this is an indication that the price will rise in the short term in order to close the gap. The opposite is true for the CAP: here he would sell the stock because he expects the price to go down again in the short termis corrected. Hedge funds work is based on a variety of experience based on past price movements. Using such data, they develop rules about when to buy and sell and implement these high-discipline strategies. In doing so, they rely on statistical probabilities derived from history, but they canAgain and again deceive, especially through unforeseeable events that unexpectedly affect the markets.

The risk of the strategy: The belief in the past

Hedge funds work with a variety of strategies, all of which aim to achieve the highest possible profits in a short time. They use the abundance of available financial instruments to secure their positions or leverage them in a targeted manner. The term hedge, i.e. security, is misleading because the system is highly speculative overall. The most important tools areIn this case, short sales, where stocks that you do not own, are sold to make profits when prices fall. If you think a stock is overpriced, you can sell it for free, so make a sale, even though you don’t own the stocks. After the price decline, they are bought back cheaper and thus a profit. This process also works ifyou only rely on falling prices and don’t use your own funds, but borrow the shares for a fee. Such strategies are highly risky because they are based on the assumption that the past is a reliable basis for future developments. This is a dangerous illusion, because the financial markets are alwaysto get out of balance again. These unforeseen events can destroy all probability models and result in significant losses that the actors have hardly foreseen.

The risks and the circularity of financial models

At its core, hedge funds are nothing more than professional dice players who rely on the probability that their strategies will succeed. They put large amounts on certain price movements based on past data in the hope that these patterns will be repeated. The danger is great because the markets are constantly changing due to sudden, unforeseeable events.change. These so-called black swans can cause financial losses of a magnitude that completely absurd the models and assumptions of the hedge funds from the past few years. The system is highly complex and is based on a variety of assumptions that over time turn out to be wrong. It is a risky game in which the actors in theRelying on happiness and probabilities based only on historical data. The danger is that these models and strategies are at their core circular because they are based on the assumption that the past predicts the future, which always proves to be a mistake. This makes the financial world an almost uncontrollable leeway in which theActors constantly live with the risk that everything will collapse when the unforeseen events strike.