Money is at its most useful when it is flowing freely, but where money flows matters too. And it matters whether it keeps on flowing into useful activity or whether it ends up being siphoned off and stored uselessly away.

This image illustrates the most rapid flow of money imaginable. It is the daily trading in London’s foreign exchange markets. The little orange box that is the head of the snail is the actual amount of the UK’s imports and exports. So this is roughly the amount of exchange from pounds sterling to foreign currencies and vice versa that is needed to service that trade. In 2022 this was about £6 billion each working day.

The much larger yellow box, on the other hand, is the amount of exchange from pounds sterling to foreign currencies and vice versa that is actually taking place on the London market. This is in the region of £400-500 billion per day.

And the big pink box is the total amount of currency trading on the London market, most of which does not involve the pound sterling at all. This is in the region of £2,500 billion per day.

How useful is any of this? Why are people trading vast sums in excess of what is needed to manage actual trade?

The answer is - because they can. Although the activity produces nothing new or useful, there is a big opportunity here for traders to accumulate money simply by recording transactions. As in all markets, they buy as cheaply as they can, and they sell for the highest price possible. Their margins may be small in percentage terms, but the huge sums involved mean that the profits can be very substantial.

We are all paying for this. The money is flowing through the economy from our purchases into these traders’ hands. Those profits make imported goods more expensive and put up the price of people’s holiday money, too. The speculative nature of the market encourages volatility as traders bet against the pound or some other currency, which creates costs for importers which they pass on to customers.

To make matters worse, the huge resources tied up in these and other financial markets are not available to be used in more productive ways. And it’s not only the money, which could be much better spent. All the skills of the clever people working in these markets are unavailable to the productive economy, where they could be adding real value.

Defenders of these activities often point to the amount of tax that traders and financial companies pay. But that tax is only ever a proportion of the amount that is being accumulated; there is still a huge loss to the productive economy. What is more, much of the money accumulated in these sorts of markets is salted away in assets such as shares and property, so it ceases to flow. And the rate of tax that is paid on accumulated assets is much lower than the rate that ordinary people pay on their incomes.

Since, however, all the company profits and the salaries and bonuses that arise from all this trading count as “economic activity” in the official tally of the nation’s production, the government would rather encourage than reduce it. The “free market” is not concerned with the nature of economic activity so long as money is turning over. But governments should be concerned: in the UK the unproductive nature of so much activity is a serious problem.

Data sources:

Because the numbers are so large and so variable, this image is representative of the order of magnitude of the data, rather than precise numbers. It is based on reporting from the Bank of England, here, and the government’s data for UK trade, here.