2016 Theme #5: The Systemic Failure of High Finance

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

This week I am addressing themes I see playing out in 2016.

A number of systemic, structural forces are intersecting in 2016. One is the failure of high finance to fix the global economy's systemic problems.

The operative conceit of the past 7 years has been that high finance can fix whatever's broken in the world's economies. According to this narrative, all the world needed to boost "growth," employment and profits was lower interest rates, more liquidity, reverse repos and some other fancy financial footwork.

Once all this high finance generated more borrowing by debt-serfs, property developers, students, corporations buying back their shares and financiers skimming billions from asset bubbles, systemic problems would be dissolved or mitigated.

Cheap credit, asset bubbles and immense profiteering by financiers would heal all wounds and make everything better for everyone, even those at the bottom layer of the economy.

Unfortunately, this isn't true. High finance and cheap credit have intensified structural problems such as rising inequality, not resolved them.

The implicit promise of the neoliberal project is that liberalizing private-sector markets and credit will magically grease the processes of growth and widespread prosperity.

When economies have the right systems in place--decentralized, somewhat free markets, an entrepreneurial spirit, many unmet needs, idle productive capacity and a credit-starved real economy--freeing up static markets and credit can unleash the productive capacity of the bottom level of the economy.

But in economies dominated by state/private monopolies and cartels, neoliberalism simply funnels the profits of financialization to the few at the expense of the many, and at the cost of heightened instability and insecurity.

Making more credit available for student loans didn't fix America's broken higher education system--it only tightened the grip of the higher education cartel and turned another generation of students into debt-serfs.

Loosening mortgage standards and lowering interest rates didn't turn America into an "ownership society"--it turned it into a boom-and-bust speculative society with many more losers than winners in the neoliberal/high finance speculative casino.

The essence of neoliberal high finance is the vast majority of gamers in the casino lose security and wealth, while the House (the state and the banks) skim the resulting profits. Main Street has found its security stripped away (sorry, Bucko, no yield on savings now; you have to belly up and place a high-risk bet at a gaming table to keep what you had before) in exchange for the potential of outsized profits.

But alas, the games are rigged; the financiers have first access to the Federal Reserve's nearly free money, and insiders profit from stock buybacks and other financial gaming that generates monumental profits but zero goods and services.

If debt had grown in parallel with GDP and inflation, total credit market debt in the U.S. would be around $20+ trillion rather than $59 trillion. The difference is speculative excess, manifested in asset bubbles and staggering amounts of debt.

The casino's losers get the debt, the winners skim the profits.

The only possible output of this system is rising income and wealth inequality:

Cheap credit doesn't reverse the elimination of jobs via automation--it accelerates that process by making capital machinery and software cheaper than labor and labor overhead.

Cheap credit and high finance don't fix what's broken in our democracy--they have greased the skids to what we have now--"democracy" for the highest bidder by giving financiers and corporations the means to stripmine productive assets and use the gargantuan profits to buy political favors.

High finance isn't the cure--it's the disease.

*  *  *

My book on the emerging economy is now available as a audiobook: Get a Job, Build a Real Career and Defy a Bewildering Economy (Audible.com).

My new book is #7 in Amazon's Kindle ebooks > Business & Money > International Economics: A Radically Beneficial World: Automation, Technology and Creating Jobs for All. The Kindle edition is $$9.95 and the print edition is currently discounted to $21.60.

 

5
Your rating: None Average: 5 (5 votes)
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 01/08/2016 - 17:37 | 7019187 FreeShitter
FreeShitter's picture

You're the disease and I'm the cure.

Fri, 01/08/2016 - 17:40 | 7019202 Bubenthauser
Bubenthauser's picture

I'm Marion Cobretti, zio porco!

 

Good ol' days, eeh

Fri, 01/08/2016 - 17:40 | 7019203 asteroids
asteroids's picture

Folks really don't get how big a trillion is, much less 30 of them.

Fri, 01/08/2016 - 17:57 | 7019265 I am Jobe
I am Jobe's picture

But most do know their data plans and usless apps. Must be the inbredding marrying HS sweetheart to not exploring the world. Benefits of being sheltered

Fri, 01/08/2016 - 18:14 | 7019332 edifice
edifice's picture

How do you explore the world with no job and no money?

Fri, 01/08/2016 - 17:52 | 7019245 Grandad Grumps
Grandad Grumps's picture

Is it really true that everything Rockefeller related sold 80% of their energy holdings in the last week or so?

Fri, 01/08/2016 - 17:53 | 7019247 Bangin7GramRocks
Bangin7GramRocks's picture

FUCKIN A!

Fri, 01/08/2016 - 18:00 | 7019278 nmewn
nmewn's picture

(Crackling mic)

"Ok folks, this is your navigator/pilot again, we're on the ground now and fortunately the smoke in the cabin will clear quickly due to the gaping holes in the fuselage. On a good note, don't bother using the emergency exits just crawl out through the holes, head for the light.

And again, thanks for flying Keynesian Air." ;-)

Fri, 01/08/2016 - 18:00 | 7019279 buzzsaw99
buzzsaw99's picture

But alas, the games are rigged

Fri, 01/08/2016 - 20:34 | 7019892 two hoots
two hoots's picture

Not rigged but designed to work that way since 1913, by law. We were rigged with "I pledge..I will...I do solemnly swear..." stuff.  Doubt articles were even written like this pre-2000, but maybe?  At least now it can be shared via the web to all, information is power on both sides.

Fri, 01/08/2016 - 18:06 | 7019302 Bluntly Put
Bluntly Put's picture

In 2008-09 we were too worried about golden parachutes for executives and insiders and failed to see that the entire time from 2009 (TARP and bailouts) was 1 gigantic golden parachute for wall street.

Fri, 01/08/2016 - 18:16 | 7019342 Bemused Observer
Bemused Observer's picture

High finance is the hubris of thinking you can control every aspect of a complex economy. It gets away from you real quick.

Complex systems like our economy work best when left alone. They evolve, and in so doing develop their own rules and methods over time, and set their own priorities. Like your body works best when left alone. When you're sick, you go and get that thing fixed, but if your doctor suggested 'fiddling' with other things on a weekly or monthly basis you'd tell him to get lost.

And can you imagine how well your body would work if your doctor took control of your heartbeat, respiration, digestion, etc, and had to coordinate it all? As good a job as he might do, isn't it obvious that a healthy body functioning naturally as it should is by FAR a superior state of being?

So why are these people so fucking stupid? I say stupid because all hubris requires a level of stupidity. Aspiring to self-control is noble, aspiring to control others is vain and destructive. And aspiring to control entire SYSTEMS and populations is hubris...stupid in that it ever thought it was capable of such a thing!

Discernment and wisdom know their limits and would never take a long leap without careful consideration. Hubris knows only what it wants and doesn't care if it violates the laws of physics...it's going over the cliff, and it's going NOW because we say it can be done!

Had they assessed the economy BEFORE going over the cliff, they might have seen the impossibly Herculean task that faced them, and decided against all the 'fiddling'.

Assholes.

Fri, 01/08/2016 - 18:43 | 7019441 Duc888
Duc888's picture

 

 

Bemused Observer :So why are these people so fucking stupid?

They are not stupid, they are scammers and leaches.  They produce nothing.  They DO however create synthetic instruments on the side to skim off of real production.

Sat, 01/09/2016 - 10:15 | 7021416 Phoenix Pilgrim
Phoenix Pilgrim's picture

+1000

"High finance is the hubris of thinking you can control every aspect of a complex economy. It gets away from you real quick."

And let us also add our "High Government" to the list of perpetrators.

Fri, 01/08/2016 - 18:16 | 7019344 Niall Of The Ni...
Niall Of The Nine Hostages's picture

Yes. Unchecked, it's fatal, on an industrial scale. High finance bankrolled the killing machines and human slaughterhouses of the 20th century. 

Fri, 01/08/2016 - 18:19 | 7019359 orez65
orez65's picture

"High finance isn't the cure--it's the disease."

More accurately: "High finance is fraud"

Fri, 01/08/2016 - 18:22 | 7019368 Rehab Willie
Rehab Willie's picture

It's all dog shit wrapped in cat shit, dipped in chocolate.

Fri, 01/08/2016 - 18:30 | 7019394 yogibear
yogibear's picture

The banksters sure dipped the CDOs a few times before Iceland bought back in 2004.

Rinse and repeat.

Now it's even more shit and more Chocolate. 

The criminals never go to jail. they just make it bigger next time.

Fri, 01/08/2016 - 18:56 | 7019478 Hohum
Hohum's picture

The hidden assumption of modern economcs is that debt will grow faster than GDP in perpetuity.  Austrians do differ, but they really have no insight as to how you get there from here except get rid of debt and everything will be skittles and unicorns.

Fri, 01/08/2016 - 19:10 | 7019527 Clowns on Acid
Clowns on Acid's picture

Must be a gold standard. There has to be an anchor. Thruout history this has been a constant. It is NO different today except for when neo Bolsheviks gain control over Media and Finance...thru Gov't. In years previous to 1917 Bolsheviks were killed. Today they flourish... well for the moment anyway.

Fri, 01/08/2016 - 19:42 | 7019661 withglee
withglee's picture

Must be a gold standard. There has to be an anchor.

Why a gold standard? The supply and demand for gold varies all over the map. The resources needed to bring one ounce into existence also varies dramatically.

Why not use an "hour of unskilled labor" (HUL) as a standard?

For virtually all of known history, give a person a shovel and ask them to deliver a hole and clock the time it takes them to do it. I submit that time was closer to being the same in 5000 BCE and today than the number of ounces of gold required to "buy" the same hole.

Further, if that digging is for gold, clearly the digging must happen before the gold can pay for it. Thus, demanding a gold standard is obviously a "non-starter".

Fri, 01/08/2016 - 20:25 | 7019861 Clowns on Acid
Clowns on Acid's picture

Dude...stfu unless you can discuss with any knowledge. Now go dig you own hole in your backyard.

Sat, 01/09/2016 - 09:20 | 7021241 withglee
withglee's picture

Dude...stfu

Boy! I guess you told me!

Sat, 01/09/2016 - 03:23 | 7020856 OverTheHedge
OverTheHedge's picture

If you used the kilowatt-hour as the basis, it is the same idea,but more elegant.

No way to get the gold bugs here to go for it, I'm afraid

Sat, 01/09/2016 - 09:18 | 7021237 withglee
withglee's picture

If you used the kilowatt-hour as the basis, it is the same idea,but more elegant.

And in 5000 BCE how were they to take these KWh readings? How are we to take these KWh readings in the event of a catastrophic reset?

With the HUL (hour of unskilled labor) we can get by with a sun dial (as long as measurements don't have to be taken at night.)

Just what is "elegant" about a KWh anyway? Is it more elegant than a joule?

Fri, 01/08/2016 - 19:05 | 7019503 . . . _ _ _ . . .
. . . _ _ _ . . .'s picture

How can one say that capitalism is only bad when it is taken to its extreme, especially since its very nature is that it be taken to extremes?

High finance is no worse than finance in general. Free markets give rise to anything which can generate capital, things like human trafficking, drug running, the war industry. None of these things would exist without the profit motive whereas all the things which positively add to society could be achieved by other means (and no, it doesn't have to be communism. There are other ways.)

Fri, 01/08/2016 - 19:34 | 7019620 withglee
withglee's picture

(and no, it doesn't have to be communism. There are other ways.)

I know there are other ways ... but just to get us started, describe just one other way you know of.

Fri, 01/08/2016 - 20:20 | 7019823 . . . _ _ _ . . .
. . . _ _ _ . . .'s picture

I know you're just testing me, but rest assured there are dozens which exist and probably many more which haven't yet been dreampt of.

Since I am a good sport: Freiwirtschaft.

Sat, 01/09/2016 - 10:04 | 7021373 withglee
withglee's picture

SOS: Since I am a good sport: Freiwirtschaft.

This is part of what Wikipedia has to say about that:

Freiwirtschaft consists of three central aspects, usually summed up as The Three Fs:

I am in total agreement. This is obvious when you know that money is "a promise to complete a trade". That it is created only by traders getting trading promises certified and destroyed by traders delivering on those promises. Inflation of the MOE is properly zero at all times everywhere. The "period" is as long as the integrity of the "record keeping process" is sustained ... which is equal to the period the society is sustained.

 

  •  Long-term saving requires investment in bonds or stocks.

Nonsense!

 

  • Freiland (free land)
    • All land is commonly owned or else the property of public institutions and can only be rented from the community or from government, respectively, not purchased (see also Georgism).

     
    Why? Georgism is nonsense! Land is claimed like anything else. In the beginning claims are defended by the claimant. In advanced societies claims are defended by the society. That never changes. The proof is in viewing "other" animal behavior. They are territorial even though they don't have the marvelous brains like Henry George believed he had.

 

Fri, 01/08/2016 - 19:56 | 7019729 Yen Cross
Yen Cross's picture

 If it was Capitalism, this " shit~show" would have ended in 2013.

Fri, 01/08/2016 - 19:10 | 7019523 pndr4495
pndr4495's picture

All that education - all those MBA & PHD degrees - and some Ivy League hot shots whip out their credentials like they're 6 shooters - but, BUT, if one suggests that these same people themselves are responsible for the deflation we're in - the pathetic record of recent job creation - a real lack of introspection that maybe this might be wrong - WHOA guy - don't blame me !! They feel entitled to be paid millions because of a supposed financial pedigree. FUCK THEM.

Fri, 01/08/2016 - 19:27 | 7019589 jm
jm's picture

The author doesn't even define what he means by high finance.  Judging by the context, he think just about any kind of credit is "high finance".  By that standard, high finance existed circa 5,000 B.C. and it isn't going away.

Sat, 01/09/2016 - 08:45 | 7021178 g speed
g speed's picture

I suppose he means any finance that requires gov't intervention --free money and coersion (maybe murder) to exist---just guessing

Fri, 01/08/2016 - 19:28 | 7019592 withglee
withglee's picture

Cheap credit, asset bubbles and immense profiteering by financiers would heal all wounds and make everything better for everyone, even those at the bottom layer of the economy.

  1. If credit is too cheap, how do you know that?
  2. If credit is too cheap, what is the right price for it?
  3. If you know the right price for credit, how do you know it?
Sat, 01/09/2016 - 08:48 | 7021182 g speed
g speed's picture

if credit is to cheap it destroys the system---duh----and is usually inforced by central something( market controls) 

Sat, 01/09/2016 - 09:24 | 7021251 withglee
withglee's picture

g speed: If credit is to cheap it destroys the system---duh----and is usually inforced by central something( market controls)

I posed three questions. Your reply is responsive to none of them. Why?

Fri, 01/08/2016 - 19:38 | 7019622 RaceToTheBottom
RaceToTheBottom's picture

Everything Fractional is just wrong.

 

Bridges cannot be Fractionally right?

Moon shots cannot work Fractionally?

Fires don't Fractionally burn?

Go to Vegas and say you want to Repothicate your money and bet with that.  See if you live 5 minutes trying that one.

 

Stop this stupid discussion.  They know it is wrong.  They do it cause they can do it with impunity.  And will continue to do it until they cannot.

Sat, 01/09/2016 - 09:37 | 7021288 withglee
withglee's picture

Everything Fractional is just wrong.

Yardsticks and rulers and clocks and calendars everywhere are going to be disappointed to learn that. So are the gold bugs who think you can value gold arbitrarily and divide it into ever smaller fractions to get around the obvious "there's only one oz. per person on Earth" problem.

Sat, 01/09/2016 - 10:32 | 7021500 RaceToTheBottom
RaceToTheBottom's picture

I do not have a problem with "Divisible".  My problem was with "Fractional".

Sat, 01/09/2016 - 16:03 | 7022810 withglee
withglee's picture

My problem was with "Fractional".

My error.

What "fractional" do you have a problem with besides "fractional reserve"?

Fri, 01/08/2016 - 21:26 | 7020100 honestann
honestann's picture

"... high finance can fix whatever's broken in the world's economies".

-----

NOBODY in any position of power ever believed that.

I so wish authors would distinguish lies and propaganda from predators-that-be (and human predators in general) for what they are.

To take blatant, obvious lies as serious, considered statements is an offense to sanity.  Sadly, some utterly insane kind of practice has been adopted to treat obvious nonsense... no matter how false, diabolical and self-serving for authoritarians of all stripes... as genuine, well considered ideas.

I'm not saying lies and propaganda don't need to be answered and refuted, because they do.  But they also need to be labeled as what they are... lies, insanity, propaganda and brainwashing.

Sat, 01/09/2016 - 08:50 | 7021186 g speed
g speed's picture

Its PC honestann --PC 

Fri, 01/08/2016 - 22:01 | 7020210 hedgiex
hedgiex's picture

Systemic failure ? In the right trajectory for the global 1% .Why the angst as many more preys among the 99% are still passive or still smoking the fed weeds. High finance will be unwound at the discretion of the elites not thru the dreams of market forces, the unwinding process is already underway and as usual the 99% only moan. groan and now watch with no bullets.

 

 

Sat, 01/09/2016 - 14:37 | 7021269 withglee
withglee's picture

 

Here is how to prepare.

http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

From the link:

Recessions occur every 4 to 8 years in a society with capitalism and little regulation.

In actuality, recessions occur when the capitalists (those who claim to have capital and claim to be the creators of money) choose for them to happen. It's their "farming operation". They call it the "business cycle".

Sat, 01/09/2016 - 11:40 | 7021793 Reaper
Reaper's picture

Our uebermenschen's science is a modern version of alchemy, where they promise gold from dross.

Do NOT follow this link or you will be banned from the site!