For the worst of all conceivable systems(apart from the abuses of a fiat money which has lost all its anchors) is one in which the Banking system fails to correct periodic divergences, first in one direction and then in the other, between investment and saving. – JM Keynes
The American economy has undergone a dramatic shift over the past three decades, call it the financialization of the US economy. This has been disastrous for the overall political economy, centralizing power and gain in a very small segment of society. Wall Street gained greater control over every aspect of Americans’ daily lives by indebting the nation. A free people are never an indebted people. The financialization process has mutated the monetary system, devaluing the dollar both domestically and internationally. It raises great questions about the monetary system for the future.
The financialization of the American economy was birthed in the 1980s, gained speed in the 90s, and reached hyper-velocity in the first decade of the 21st century. If one wanted to pick a somewhat arbitrary, though nonetheless significant starting point, it would in 1980, the Congress removing usury laws controlling interest rates. The removal of the usury laws gave a green light to the financial sector that more money could be made on money. This led to the promotion of debt and the infamous financial innovations initiated with the destruction of financial regulation in place since the 1930s New Deal.
Financialization is a money game, adding little value, and I would argue more accurately, no value to the real economy. It distorts the accounting of real value. Most importantly, it is simply a private tax on the rest of society for the profit of a small oligarchy. The true costs remain hidden until the system is inevitably forced into crisis.
The financialization numbers are simply staggering. In 1950, manufacturing represented 30% of the US economy, today it is down to 8%. At the same time, the financial sector rose from 10% of the economy to 20%. Even more shocking is corporate profits for the entire financial sector, including insurance and real estate, went from 10% of the economy to 45%, while manufacturing profits dropped to 8%.(Kevin Phillip, Bad Money)
Financialization is the creation of debt, and boy did Wall Street create debt! As wages stagnated and were replaced by debt, US household indebtedness rose from $2 trillion dollars in 1984 to $13 trillion twenty years later. The last leg of financializaton was the housing market. Mortgage loans went from 30% of bank loans in 1985 to 65% in 2005.
The creation of debt is the creation of money. With so much money flooding the system, Wall Street, being the clever folks they are, grabbed the opportunity to make more money on money using “financial innovation”. Two of the greatest of these innovations are securititaztion and derivatives. Securitization is taking existing debt and piling it into new debt “products”, so it can be sold again. The other great innovation was derivatives, which are simply bets placed on all existing debt and financial transactions. You don’t need a stake in the debt or transaction to place a bet, a true casino, where the house – Wall Street – makes money on each bet.
The FDIC reports annual mortgage securitization went from $110 billion in 1985 to $2.7 trillion in 2005. Meanwhile, the Bank for International Settlements states in 2008, derivatives represented $684 trillion in positions, on a global economy of $60 trillion. In its quarter-century of exponential growth, debt, depending on which sectors you choose, expanded by factors of anywhere from the tens to hundreds. While the US economy grew only 2.5 times larger, though this is a misleading figure as it accounts much, though not all of the financial bubble. What financialization has created is a massive money bubble on top of the real economy, which for various reasons doesn’t filter completely into the real economy. As Keynes writes,
But the volume of trading in financial instruments, i.e. the activity of financial business, is not only highly variable but has no close connection with the volume of output whether of capital goods or of consumption-goods.
Total debt in the US is somewhere over $50 trillion, which means compared to fifty years ago where each 1.5 dollar of debt represented a dollar of economic activity, it is now close to five dollars of debt for each dollar of activity. This whole process of greater indebtedness is a burden for the vast majority of the economy. Its massive profits are only realized by a few. Today, six institutions account for over 60% of the financial industry, which taken together with the growth of the financialization means a concentration of power unprecedented in American history.
The question is what does this mean for money. If we used Keynes’ arbitrary categories, we see a massive rise in Money of Account, which greatly distorts General Purchasing Power to a degree not yet quite understood. It has debased the monetary system as any sort of standard by which general economic activity can be accounted and valued. The easiest example of this is housing prices, but this butcher accounting and mis-valuation are both ubiquitous across the economy.
Now, the off-book, that is the true accounting of money has been in part brought onto the books due to the panic of the financial elite in the fall of 2008. Through the agencies of the Fed, Treasury, and Fannie Freddie, trillions of dollars of private debt has been transferred to the public books. In addition to this, the public sector has also created new debt, adding to the overall debt burden. Yet, there remains a tremendous amount of worthless debt, unaccounted losses, or dead money, on the banks books, government books and across the entire economy, which will hinder and distort future economic activity. We now have a massive debt load, continuing to devalue the monetary standard and as the dollar is the de facto global monetary standard, the distortion of economic value, that is, the monetary bubble has now spread across the globe.