Here, instead, is the fable we’ve been offered: Sad as it might be for some workers, towns, cities, and regions, the end of industry is the unfortunate, yet necessary, prelude to a happier future pioneered by “financial engineers.” Equipped with the mathematical and technological know-how that can turn money into more money (while bypassing the messiness of producing anything), they are our new wizards of prosperity!
Unfortunately, this uplifting tale rests on a categorical misapprehension. The ascendancy of high finance didn’t just replace an industrial heartland in the process of being gutted; it initiated that gutting and then lived off it, particularly during its formative decades. The FIRE sector, that is, not only supplanted industry, but grew at its expense — and at the expense of the high wages it used to pay and the capital that used to flow into it.
For more than a quarter of a century the fastest growing part of the economy has been the finance, insurance, and real estate (FIRE) sector. Between 1980 and 2005, profits in the financial sector increased by 800 percent, more than three times the growth in non-financial sectors.
In those years, new creations of financial ingenuity, rare or never seen before, bred like rabbits. In the early 1990s, for example, there were a couple of hundred hedge funds; by 2007, 10,000 of them… Fifty thousand mortgage brokerages employed 400,000 brokers, more than the whole U.S. textile industry. A hedge fund manager put it bluntly, “The money that’s made from manufacturing stuff is a pittance in comparison to the amount of money made from shuffling money around.”
Wealth comes from production, not its taxation – by government or the financial sector. If money printing dilutes the existing stock of money in relation to goods, effectively “taxing” and devaluing existing money, then the creation of credit money by the financial sector has the same effect. If one is bad, then so is the other. Government might be a poor allocator of capital, but aggregating ever more resources to the financial sector is just as destructive.
The fact the finance can pay so well implies that its rampant growth may be even more damaging than that of government. Finance is more likely to attract the truly talented, who ought to be founding new Microsoft’s, Apples, Fords or curing cancer. Some of them are more likely to pursue such a socially beneficial path if the other option is to become a bureaucrat rather than a stinking rich financier.
Of course the rampant growth of the financial sector is facilitated by the blurring of money with different types of assets. This is an inevitable function of the lived experience of people during a period in the economic cycle. Those who live a different experience during a different part of the economic cycle form a different view. During depressions and crashes the true value of real “money” shines forth. Assets that appeared to be money, even ones as “safe as houses” become worth less, or even worthless.
Those who have recently lived through deflation are likely to instinctively hoard their fiat currency and behave quite differently to those who have recently experienced hyperinflation. Ditto for those with other “lived” experience. “Never a lender or borrower be” can seem obvious or stupid, depending on where people sit in the economic cycle.
Truly to know where we are going and how people and markets are likely to behave it is necessary to know where we have come from. Most economic and financial commentary completely ignores this. Is it any wonder it is so often wrong?