Financialization

Guest Post by The Zman

One of the things that ails us in the modern age is we have yet to adjust our thinking to the modern economy. The great political-economic thinkers lived in a time when money was either gold, backed by gold or a fiat currency. The result is our political and economic debates are based in the logic of a world that no longer exists. The modern global economy is not based on fiat money or hard money. It is based on credit money, which has a unique set of characteristics.

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For instance, the US government is no longer able to print up greenbacks and sprinkle them on the economy. Instead, when they expand the money supply, they expand lending, both domestic and global. It’s not just any sort of lending either. The central bank can buy up long term notes in order to drive down long term lending rates, thus expanding lending for capital goods. Alternatively, they can buy up short term debt and increase the amount retail lending. The Federal Reserve holds close to 2 trillion in mortgages, for example.

There’s no question that this new form of currency arrangement has had benefits to the West. Libertarians and goldbugs will spend hours arguing against this sort of currency manipulation, claiming it will lead to a financial collapse, but so far, the opposite has been true. The mortgage meltdown of 2008 did not result in a global depression. The worst you can say of it is the result has been a long, localized recession. The rulers look at current asset values and see a ringing endorsement of credit money and central banks.

Putting that debate to one side, there are longer term problems that come with credit money. One is the slow eating away of the middle class by eating away at small and mid-sized business. The most obvious example is the collapse of retail. The old joke was that Amazon turned big box stores into their showroom. Consumers would go to Best Buy to look at electronics, get free advice and then go on-line to buy them. This can only last for so long and the mass closure of retail stores we see this year suggests the end is near.

The libertarian argument is that the more efficient business has displaced the less efficient business, and that’s not completely wrong, but it ignores the salient aspects of this phenomenon. A world in which everyone either works for or buys from a global company run by a Bond villain is not a world most people want for themselves or their progeny. There’s also the question as to whether it is economically sustainable. Business needs customers and customers need jobs in order to have money to be customers.

There’s also the fact that Amazon would not exist without credit money. In a world of real money, Amazon would have gone bankrupt long ago. This is true of the social media companies that now control public debate. None of them would have made it past the hobby stage if not for the financial system’s ability to conjure credit money. In effect, we now live in a world where the rulers can make their money more valuable and your money worthless, simply by manipulating the amount of credit money.

There’s another way in which the financilization via credit money erodes social stability by undermining the middle-class. Take the example of industrial supplies. This has always been a middle-class, local business. The “value” added was the owners willingness to invest in their location and facility in order to meet the needs of their local customers in the commercial trades. They were almost always family businesses with the wife running the office and the husband running the shop.

The miracle of credit money has allowed investors to back the acquisition and consolidation of these mom and pop businesses. The way it works is investors back one business buying up other shops in the area. This allows the new owner to replace the previous owners with low cost salary men. It also allows for the consolidation of accounting, IT, human resources, etc.. This makes the over all business more efficient, giving libertarian economist a tingle in all the wrong places.

This increase in efficiency does not mean lower prices to consumers. It often means the opposite. In some areas, there’s no longer competition so prices rise. The economic gains from efficiency show up in the returns to the investors. The lack of community investment, like sponsoring local little leagues and social organizations, is also stripped out and returned to investors. This is great for a Bain Capital, but it is terrible for the local communities. Instead of communities, we now have areas populated by strangers.

Another useful example is education. Just a generation ago, a college diploma had real value that exceeded the purchase price. The financialization of college has not only decreased the initial value of the diploma, it has stripped away much of its long term value through the student loan rackets. The only people benefitting from college today are the people running the colleges and the money men financing it. The school makes millions staging mock combat with retarded black men and your kid gets saddled with the debt.

Credit money has unleashed financial pirates on the American middle class, turning every small town and family business into a Lindisfarne, in the eyes of our financial class. A big reason why the economic data looks good, but the the people are revolting is the social capital that held together the American middle has been financialized and moved to the balance sheets of global financiers. Increasingly, the relationship in the modern American economy is not between buyers and sellers, but between predators and prey.

At least when the Vikings raided a village, they did not demand that the locals celebrate their ruination. It was a raid and the local authorities tried to prevent it. That’s the other aspect of this that is eating away at our civic life. It used to be that government worked to reign in the financial tricksters, not because they cared about the suckers, but because it was bad for politics. Today, if the political class has anything to say about it at all, it is usually a celebration. The Danegeld has now become an institution.

When Alfred the Great faced off against the Great Heathen Army, he quickly learned that adherence to old customs and old ways was a liability. The world had changed. In fact, it changed so much that he nearly lost his crown before he could adjust to the new realities presented by the Viking raids. The Norse played by a different set of rules and they had no respect for the Anglo-Saxon ways. In fact, they sought to exploit those ways to their advantage. To survive, Alfred had to embrace new tactics and new methods.

Eventually, Alfred resorted to guerilla tactics, something previously seen as dishonorable by the Anglo-Saxons, to weaken the Danes and maneuver them into the decisive battle at Edington. The point here is that those old economic arguments from the libertarians, like those constitutional arguments from the Buckley Right, are no longer relevant. In fact, they are now hindrances. The modern pirates have figured out how to turn our virtues into vices. That means we will need new virtues and new tactics.