19 Jan 2011

The BIS Triennial Report and its implications

I've just found the full report from the Bank for International Settlements entitled "Triennial Central Bank Survey: Report on global foreign exchange market activity in 2010". You can download the full report that was published in December 2010 here, and there's an excel summary file that you can download here.

This is the report, generated every three years, that provides pretty comprehensive figures about daily trading during the month of April. The figures are eye-watering. Global foreign exchange market turnover was running at $4.0 trillion per day. I'm still not sure how this scales up over a year, but I think that we can assume that it will be about 250 times that value - let's say $1,000 trillion (that's a one with 15 zeros after it).

Much of the increase from 2007 apparently reflects "the increased trading activity by “other financial institutions” . This counterparty category covers financial institutions not classified as reporting dealers, such as non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and centralbanks, among others". In other words, transactions that are probably not visible using standard methods.

The report notes that "Banks located in the United Kingdom accounted for 37% of global foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%)".  I guess that this means that we can assume that foreign exchange turnover for the UK alone would be around $370 trillion over a year. 

The report also provides details of activity in the global interest rate OTC (over the counter) derivatives market. This was running at $2.1 trillion a day in April - lets call it a round $500 trillion over a year. Again, the UK wins hands down : "The United Kingdom continued to be the most active location with a share of 46% of worldwide trading, followed by the United States with a share of 24%, slightly down from 2007." Can I call that about $230 trillion for the UK alone over a year?

People of Britain! We need to get the UK government to unilaterally impose a flat rate financial transaction tax and simultaneously abolish all other taxes (VAT, income tax, corporation taxes etc). A 1% tax should generate at least $5 trillion dollars of revenue in the first year (1% of $360 trillion in foreign exchange, and 1% of $230 trillion in the interest rate derivatives market).

Sure, the volumes would drop rapidly (Good - such activity has almost no value - I challenge anyone to explain why this level of speculation has any utility apart from generating bonuses for traders). Maybe the city's traders would move somewhere else (Good for everyone except the Maserati traders). But the short term benefit would pay off all the UKs national debt (currently about £1.1 trillion). And you would be left with a country with no taxes on company profits, no VAT, no income tax. The country would become the best place to do (real) business.

If it turns out that the financial activity in the city completely collapses, and it turns out that the government ends up having to increase the flat rate FTT to 2%, I don't think anyone would really mind. For most people, even a flat rate FTT of 10% would be better than the current totally unfair and totally stupid tax system.

If there's something wrong with this argument, do let me know.

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