Posts Tagged ‘Finance’
Money, Finance & Parasitoids

We examined the parasitoid nature of much of our privileged elite here. This post does the same for much of the financial sector. Money quotes being:

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.

and

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?

 

 
Incapable of Reforming Itself

Jesse nails it:

A credibility trap is when the regulatory, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform or even honestly address the situation without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves.

The status quo tolerates the corruption and the fraud because they have profited at least indirectly from it, and would like to continue to do so. Even relatively honest reformers within the power structure are susceptible to various forms of soft blackmail and coercion.

And so a failed policy and its support system are almost self-sustaining, long after it is seen by the people to have failed. In its failure it becomes counterproductive, and an impediment to recovery in the real economy. Admitting failure is not an option for those who receive their power from that system.

The continuity of the structural hierarchy must therefore be maintained at all costs, even to the point of becoming a painfully obvious hypocrisy.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

I could not put it better myself. This further explains the move by our governing elite to constrain free speech. A tendency recognized by denizens of the opposite ends of the political spectrum, such as Goebbels and Hayek :

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”
Joseph Goebbels

 

“Everything which might cause doubt about the wisdom of the government or create discontent will be kept from the people. The basis of unfavorable comparisons with elsewhere, the knowledge of possible alternatives to the course actually taken, information which might suggest failure on the part of the government to live up to its promises or to take advantage of opportunities to improve conditions–all will be suppressed. There is consequently no field where the systematic control of information will not be practiced and uniformity of views not enforced.”
Friedrich A. von Hayek, The Road to Serfdom

It’s little wonder the governing class across the English speaking world are so determined to remove not just the right, but the expectation of free speech. If they get their way, we know where we will end up:

“When any government, or any church for that matter, undertakes to say to its subjects, ‘This you may not read, this you must not see, this you are forbidden to know,’ the end result is tyranny and oppression, no matter how holy the motives. Mighty little force is needed to control a man whose mind has been hoodwinked; contrariwise, no amount of force can control a free man, a man whose mind is free. No, not the rack, not fission bombs, not anything—you can’t conquer a free man; the most you can do is kill him.”
Robert A. Heinlein, If This Goes On, 1940

George Orwell wrote 1984 as a warning, not a how to manual. Something we need to recognize if we are to resist big brother and the thought police’s propaganda.

It’s the kids I feel sorriest for. Governments will lose the ability to maintain their big lie. Much of the governing class will try to resort to tyranny to maintain their relatively privileged position. This process and the overthrow of the big lie will tear core societal assumptions and structures asunder.  It’ll be as traumatic for us as was the ending Communism and the defeat of Nazis for Nazis and communists. Most have no idea what they will lose:

“It is worthy of remark that a belief constantly inculcated during the early years of life, whilst the brain is impressible, appears to acquire almost the nature of an instinct; and the very essence of an instinct is that it is followed independently of reason.” Charles Darwin, The Descent of Man, 1871

Reality always wins.

 
Economic roller coaster to hell

Dongguan in Guangdong is on the brink of bankruptcy. Up to 60 per cent of its villages are running up deficits and will soon need a bailout from the township.

It’s a race to the bottom between the US, EU, Japan and China to name but the four largest global economies. It’s perfect timing for an alternative currency to come into being.

It’s not so much a case of being on a road to hell, but a roller coaster.