financial foundry

FINANCIAL FOUNDRY
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Popular press pronunciations and putrid pundit proclamations to the contrary, the vision we have been sold of a economy based on finance is slightly flawed. Okay, it is either a damn lie or a huge misconception. We have cries of disbelief that our manufacturing economy was disbanded generations ago ( a slow downward spiral after WWII which was goosed into overdrive in the 70’s ), and that financial activity has taken its place. You can hear this from almost every source of non-conventional analysis spouting a return to a gold standard or a populist political platform. So, automatically we picture either/or dudes on a trading floor screaming to sell pork bellies, or a shifty eyed banker with his pressed trousers puddled around his loafers as he is sodomizing a Third World peasant. But I’d like to suggest that rather than jobs being created in the financial sector, the only thing that has actually happened is that we all just went into debt, and that the growth of the financial sector was just us getting into more and more debt as time went on.

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Obviously there is financial activity which generates profits. The one and a quarter quadrillion dollar derivatives market generated some kind of churn in fees. And for every item you buy, there is a level of cost that related to business loans. My point is not that a lot of dollars don’t change hands. They do. Merely that underpinning all that activity is simple debt. Consumer debt, business debt and government debt. And the only way that sector grew was through additional debt. Here is a fun filled fact that got me thinking on this. In 1970, the state of California spent 31% of its budget on higher education. Today ( well, a few years ago in 2005 before all the budget emergency fuss started ) it is 12%. Back then, the state spent 4% on its prisons. Today that is 20%. Obviously, there was a lot of crime in the 60’s, what with riots and protests and such. And folks need a college education now more than ever as there are less trade jobs around now compared to then ( for a traditional career path, anyway ). So, what changed? The percentage in these two activities totaled a third of the state budget both times. Why did they switch? Back then, the taxpayer bought a college education and in theory the profession that was generated bought in so much extra money ( from the Feds for the defense industry, most likely ) that the high income tax more than paid back the cost. It was a simple investment that paid well for the state. Why did that money go to the prisons? My guess is that less and less federal money was coming in, so college became a burden rather than an investment. The cost was slowly but surely transferred to the students and their parents. The prison industry created more taxes and more state employees which were unionized which created a huge pension fund which was used by the state as a slush fund ( not as bad as Social Security of course ). The taxpayers aren’t going to pay more for students, as the perception is that they get all the benefits at taxpayer expense. But prisons “make the streets safe” ( of course it doesn’t, and a correlation could be drawn between prison spending increases and increased crime rates ) in the eyes of the citizens and increased taxes are tolerated there. And of course, with a collage education, a citizen could flee to another, saner, state, cheating the state of future income. With prisons, the money stays circulating in house.

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By spending less on education, and forcing students to mortgage ten or twenty years of their future income to pay for an education, the state can spend money elsewhere, and boost the presence of bankers preying on their victims. More economic activity. In short, rather than putting forth a helping hand, the only help students get is information on how to get into debt. The state of California, being a bellwether state, showed us long ago the general trend. Increase taxes, cut services, and yet also get into so much debt that it can never be repaid. Now, I’m sure I’m missing something fundamental here. There is a profit motive somewhere for the state to shift to the prison industry rather than the education industry. But the end result is every layer and level gets into a spiraling amount of debt which looks like economic activity and growth and the only beneficiaries long term are the bankers.

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If 70% of the economy is consumer spending, and we aren’t making those products, how do we get the increased money every year to show growth in that sector? It can only be increased debt. And the growth in debt is the fuel for the financial sector, and taxes. Any new activity generates more taxes. Yet even that increased level of taxes isn’t enough and the government borrows more and more money. Look at the county in Georgia that just filed for bankruptcy ( over an enormous bond over an some work project put them over the edge ). No matter how clever we got redistributing the financial cards, there was always a shortage for someone and they borrowed to make up for the shortfall. All this incredible debt is no news to anyone. But I think the generation of that debt was the total of our economic activity and growth. Nothing more to it. Now that the levels of debt became unsustainable ( we already reached the point that we couldn’t even pay the interest since we passed the point of no return ), not just here but globally, especially Europe, there is no where to go but economic implosion.

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Only hyperinflation is left. If debt can no longer be manufactured, and debt was growth, the only growth left is in the money supply. That won’t last long of course. But you work with what is available to you. No central banker in history voluntarily stopped the printing presses in time to save anything.

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