So, here we go again. In essays past, I've made the point that being the globe's reserve currency, aka New Gold, has certain consequences. One of those is the need to run trade deficits with the rest of the globe in order keep a growing supply of moolah available. Without such, the global economy slips into deflation, as was the case through the end of the 19th century when all worshiped Old Gold. Part and parcel of this monetary regime has been the surge in the USofA's reliance on banksters for employment and GDP. Neither aspect of being the New Gold is necessarily beneficial to the USofA or the rest of the globe. Two more pieces today on point.
First, Gretchen Morgenson reports on research into banksters swallowing the economy. It is not a Good Thing, of course.
According to a compelling new paper published two weeks ago by the Bank for International Settlements, high-growth financial sectors actually hurt the broader economy by dragging down overall growth and curbing productivity.
As screamed from these pages: you can either make things, or suck off the teats of those that do. Banksters are suckers. Morgenson doesn't quite close the loop of logic by asserting that bankster salaries and profits necessarily come out of cash flows in the real economy. But close.
The paper is titled "Why Does Financial Sector Growth Crowd Out Real Economic Growth?" and it builds on past research that found that overall productivity gains were dragged down in economies with rapidly growing financial industries.
Recall, even recently, the observation that using quant methods in human activities is fraught with peril, since, unlike with nature and God's laws, some humans get to change the rules to suit themselves at the expense of others?
Also questioning the dominance of finance in our society is Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business. In his 2012 book, "A Capitalism for the People," he wrote that the financial sector, "thanks to its resources and cleverness, has increasingly been able to rig the rules to its own advantage."
And that from a Freshwater university, where the rightwing reigns supreme!
Morgenson ends with:
Ideally, finance should propel an economy by helping create jobs and wealth for a broad portion of the population. But clearly, there's a point when finance sucks too much oxygen out of the room, leaving the rest of us gasping for air.
Bigger, in finance, it seems, is not better.
Next up, the rightwing's favorite whipping boy, The Fed.
America's New Gold is run by the Federal Reserve (sort of, but that's a longer story), and Adam Davidson tells the backstory. He starts with the San Francisco earthquake that motivated the creation of the Fed. Lots of gold physically moving all over the place. One point that is too often never mentioned, but Davidson does, is the nature of 19th USofA economy:
There were [bank] runs, and dozens of financial institutions failed in what was the country's worst financial panic to that point -- which is saying quite a bit, because the country had weathered major financial crises every generation since its founding.
Social Darwinism is really the nature of American Exceptionalism, historically. Not something to be proud of, in fact. But all those Montana militia guys think it's still them and their squirrel guns. Sigh.
So, what happens when a country's currency is the globe's reserve currency? Among other things, it becomes the safe refuge if there's an economic hiccup anywhere. The resulting tsunami of currencies into The Buck causes its value to rise. And then what happens?
The modern dollar was born because Americans wanted control over their own economic destiny. But now the rest of the world is at our whims.
And when that "whim" is self-preservation of the USofA, the externalities, the econ set calls it, can bite the innocent.
In 2011 and 2012, with its "quantitative easing" program, the Fed created tens of billions of new dollars each month. Enough of those dollars flowed to Turkey that the economy there grew by around 9 percent for two years. "That's China levels," [Inan Demir, chief economist of Turkey's Finansbank] pointed out. In 2013, when Ben Bernanke, then the Fed chairman, announced that the Fed would stop making all those new dollars, the Turkish stock market fell by a third and hundreds of thousands of Turks lost their jobs. The story is similar in South Africa, Hungary, Indonesia, Brazil, Lebanon and many other emerging markets, where economic policy makers and corporate executives anxiously await Yellen's every word.
Much the same thing happened in the race to the Great Recession in Spain, where Germans in particular, shifted large amounts of moolah into seaside residential real estate. Then, they didn't. Oops.
These days Yellen and the Fed, it seems, are out to force the string to straighten up and do its duty to the economy. The idea behind QE was always to incentivize the Job Creators to make real investment and Creat Jobs by lowering the cost of capital to the point where just sitting on it made the opportunity cost so horrible that not Creating Jobs wasn't sensible any more. Still hasn't happened, on the whole. Corporations, and the .1%, are sitting on trillions of dollars, hoping for a depression and the resulting deflation. If some Palin is in the White House, they'll get to keep their winnings; Palin-lite won't re-set The Buck to diminish the windfall. We'll be the New Ireland. I can't wait. The force is inflation. Sitting on moolah when there's no inflation in the economy (even, some months, outright deflation) waiting for The Big One to drop in your lap follows the incentive. On the other hand, if there is material level of inflation, the incentive is to use the moolah in real physical investment to earn something. So far, the Masters of the World have not been able to find such investments. The crux of the matter is: have the MoW been obstinate, or have we reached the point in our understanding of the Newtonian world that new and better stuff just isn't out there? Did all that moolah go to real estate not because the MoW were infinitely risk averse, but because they just couldn't find anything better to do with the moolah? For once, having the MoW quaking in their boots is actually the better reason.
Davidson ends up with some musing on finance, Newton, Heisenberg, and the Great Recession. Then he spoils it all,
The financial crisis came about because people believed they were in a world of risk -- where the chance of default on mortgages and more complex derivatives can be plotted with great precision -- when instead there was deep uncertainty afoot.
Wrong, wrong, wrong. They could be plotted, and were, by those not beholden on the scam. All one had to do was look at the median house price to median income ratio to see that deceit was afoot; the end game wasn't the least bit uncertain, but foreordained. But both the perps and the business press chose to be blind. The former because they were raking in the moolah, and the latter because they wanted continued access to the perps for stories.