Tuesday, December 1, 2015

Our Financial Sector has Become a Parasite

This post is (mostly) a copy of a comment (@131) in response to reason (@123 & @ 124) over at Crooked Timber:  http://crookedtimber.org/2015/11/29/secular-stagnation-and-the-financial-sector/comment-page-3/#comment-650750

This is John Quiggin, the original poster, quoting himself in a previous post:

The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn’t produce much in the way of new private investment.

“Hugely costly financial sector” does not really describe what is going on:  Massive tumor sucking the life out of its host is a much better description.  The financial sector no longer serves society.  It serves itself.  Indeed, is 'Serve Oneself." not the motto of Capitalism?  While the financial sector, (and we are talking about the activities of the large, and very large, and the wealthy, and very wealthy,) does occasionally allocate resources in the rest of the economy, to the rest of the economy, mostly it plunders the resources of society and allocates those resources to itself, for its own engorgement.

My comment:

You have disinflation in the real economy, but inflation in the fictitious (financial) economy. They have become separate economies. Money is being taken out of the real economy and pumped into the financial economy. Not only does this drive up the price of financial assets, (like money, BTW. but other assets which do not have a real value in themselves, but only value depending on the health of the real economy. Most tech toys and their industries, for instance. ) but financial assets chasing each other also drive up the price of financial assets.

Imagine a continuum of reality, starting at the left and going to the right, most real on the left, and decreasingly real and increasingly imaginary as you go to the right : Food and energy, on the left end, mining, then manufacturing, transport, etc, retail, hospitality, etc. in some order, high tech in there somewhere, then money in its various forms, bonds, stocks, etc. derivatives, other phantasmagorical financial instruments. It is an enormous bubble of ‘value’ where each item to the right is dependent for its survival on the health of the parts of the economy to its left. If, for instance, the food and energy sectors collapse, none of the rest of it will have any value.

The economy on the right is easy to capitalize and leverage and extract (financial) profits. So all investments are allocated over there. ( Capitalism invests in what is profitable, and only incidentally in what is needed.) The economy on the left, however, is leverage poor, and profit poor, so it is instead being allowed to deteriorate, and even where possible, plundered for its capital.

It is the size of this bubble which is maintaining the value of the dollar. And as the bubble increases relative to the size of the money supply, the value of the dollar also increases. (There is also a deflationary effect due to the trade deficit, since money is continually being taken out of the real economy, and put into the fictitious economy when, say, the Chinese deposit their money in US banks.)

It is all, of course, a manifestation of debt. Were the debt of the real economy honestly accounted for, it would be clear to everyone that there was no possibility that the people who actually produce the things we need could ever paying those f**king bloodsucking leeches even a fraction of what our f**king masters of the universe have defrauded the people of the world out of.

Indeed, our masters own our world, and our country several times over.
It just comes down to the day they decide to collect what is owed them.


  1. My theory of how the apparent value of present USA money has been maintained is that the money has been divided into two realms, that of the rich and that of the not-rich, whom I will call 'the poor' for the moment. In the realm of the poor, the value of money is connected to the actual goods and services produced by labor, immediately or previously and saved. As long as the supply of money to the poor is limited, it retains its value (in terms of representing labor). In the realm of the rich, who can presently create and borrow money in large quantities at near-zero, sub-inflation interest, money is credit and has little to do with labor. A good deal of it is in fact imaginary, such as the theoretical capitalization of Facebook, Uber, or the aggregate price of Manhattan real estate. There is so much of this imaginary or funny money that even if the entire employable population of the USA were enslaved and forced to work to pay the debt, they could not produce the value in any reasonable time frame. But as long as the funny money is mostly kept out of the hands of the poor, and as long as foreign countries can be conned or threatened into sending the US goods, and as long as the Potemkin Village of the financial sector is maintained in working order, the illusion can be maintained. The interesting question (for me) is when and where the system will break.

    1. My analysis exactly. Note too that the inflating bubble of quasi-money also helps to boost the (fictional) value of the dollar, and so too the deflationary effect on the real economy of us plebs.

      Also the trade deficit contributes on both sides of the divide. See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

      As for the slaves ever paying off the debt, I think the point of Piketty's book is that once g, the real growth rate, becomes less than r, the growth rate of the imaginary sector, it can never be paid off, but can only grow. However, I do not think he is quite correct in (I think) identifying r with the interest rate. Once the notional value of the imaginary sector becomes greater than the nominal value of the real sector, r can be less than g, and the imaginary sector can still grow faster than the real sector can. For instance, if the imaginary sector is 3 times the size of the real sector, if r = g/2, then the imaginary sector will still grow at a rate 1 and 1/2 times the rate of the real sector. So if the real economy grow at a rate of 3% per year, and the imaginary sector is nominally 3 times the size of the real sector, then an average interest rate greater than 1% will make the debt impossible to ever pay off.

      But the point of impossibility was actually reached long ago.

      And there are other considerations which aggravate the situation.