The US, Europe and Japan have been using old and hideously twisted economics
and old ideas to try to solve a massive decline in business. Their financial markets, insulated by both practice and ideology, are disconnected from mainstream economics. You can invent a financial product, sell it on the financial markets, and that product will have absolutely nothing to do with real business. Billions of dollars’ worth of financial products sail back and forth on the markets through hedge funds, banks and private equity firms.
Utopian as this was for a while, the fact is that when this overinflated machinery invests, it invests in itself. That money usually gets caught up in the latest horror story from the markets, and is effectively destroyed. The Wall Street Crash of 2007-8 produced a new phenomenon which has yet to be acknowledged- The financial markets, the uber-capitalist machines, can destroy real and nominal capital faster than it can be produced.
“Real capital” is the sort of hard money which is used as liquid assets.
“Nominal capital” is the book value of investments and property, so called because it includes the paper profits and book values of assets, rather than their sale price values.
In 2007-8, America’s nominal capital was exterminated en masse. Middle America, the driver of the hard cash version of the economy, was disembowelled and flayed alive. It was a real world first. Never before had any economy figured out how to lose trillions in so many ways. House prices were maimed. Jobs and sources of income were obliterated. Business investment was incinerated.
What wasn’t noticed in all the informed brilliance at the time was that the real capital economy was totally mutilated. It’s not surprising that it wasn’t because then as now, the financial markets weren’t interested. They were in their own little world of fictitious figures and balances worrying about how the fairy tales would turn out for tomorrow’s meetings.
Governments, which should know better, also took a novel approach. They decided that the people who caused the problems would know how to fix them. They assumed that the financial sector’s self-obsession would naturally correct itself. and things would get back to normal. This is what happens when you bring up an entire generation on a phrase like “market forces” without telling it what those forces are.
The initial result was a gambler’s solution which has never worked anywhere on Earth- Make money cheaper so people can borrow more. Great idea. The lenders took the cheaper rates and went back to investing in themselves. Again, the money was being diverted from Main Street, which naturally rebounded on the markets as more dismal results trudged in from the real world. More capital was destroyed.
Borrowing to buy into collapsing markets which were scared of every passing minute of trading was a great idea. It just never had a hope of working.
The second result was “print more money” People like money, and they’ll like having more of it. We’ll make our goods cheaper, so people overseas will buy more. Another brilliant innovation, hampered somewhat by the “Which came first- The egg, the chicken or KFC?” issue which was instantly created by trying to reverse a policy of offshoring which had been in place for decades.
In effect, this was an attempt to restart the 1950s economy, when America produced its own goods. Good economic theory, incidentally, holds that competition and efficiency produce lower prices. Lower prices effectively make people richer, because they can buy more. The offshoring policy was “produce low and sell high”, and it supported whole armies of accountants, lawyers and managers, but not Main Street.
Main Street was actually being written out of the capital economy back around 1990. Apparently nobody told the financial garden gnomes that it was where the hard money came from. Main Street was marginalized, and real money didn’t look as good as the shiny new fictional stuff. The result was inevitable.
Meanwhile the amounts required to fund business increased exponentially. The amounts required to fund business went up in an inflationary nuke explosion as costs of operations, borrowing and overheads go up. If it cost $1m in 1970 to fund a business, it now costs about $3-4m, to be nice about the numbers.
Real capital used to be sourced from real business. Business growth was based on rational business practices. Businesses borrowed with an eye on survival. Thanks to the rise in capital costs, borrowing is now risk management more than business practice.
The market money simply doesn’t go to new business that generates real economic activity. Politicians and economists sagely talk about creating new jobs to rebuild economies. They never talk about where the money to create these jobs is coming from. There’s a lot of money running around the markets, and none of it is going to new business investment.
Quite the opposite, when the crash happened, a lot of business expansion was the first thing put on ice, and it’s still there, 5 years later. Economists have been plugging political views, not economics. They’ve lost sight of the world. Main Street doesn’t rate a mention, but the high moral values of tax cuts do. The real world economics of housing, education and health aren’t even in theoretical mode.
Governments can’t tell the difference between politics and actual government. Political views are just that- views. Your views can be as fictional as you like. You can scream about your high personal standards of integrity and the importance of making sure nobody has any rights and why you’re a nice cliché-ridden gerbil, and it’s relatively harmless. Nobody has to listen or do anything about it.
Government is about actually running the real operations of administering a country. There’s no fiction in it. If you have a train wreck, you don’t need views. You need emergency workers and doctors to manage the carnage, body bags and counsellors to cope with the human costs.
1. Finance seems to think it’s government. It isn’t, and shouldn’t be.
2. Government seems to think it’s finance. It isn’t and shouldn’t be.
3. Main Street is drowning in costs and debts. It is, and it shouldn’t be.
4. Real business is crippled by basic finances. It shouldn’t be.
Bottom line- The real global economy can’t support a real recovery because there’s no money getting through to it to do real business. Things are staggering along mainly because people aren’t simply dropping dead.
I’ve tried to make this article readable, and at least put issues in context with facts. Unfashionable as both these options are, I’d now like to ask a few questions:
How in the name of dead civilizations could anyone miss these points?
How many glaringly obvious issues does it take to get a single sane response out of these morons?
How much fiction can people believe to be fact?
How many experts does it take to totally trash a global economy?
Suggestion- Shut up for once and pay attention to real issues. Deal with facts, not fiction. Lose the rhetoric. If you have nothing to say, say nothing.
Bad business is bad business. Bad economics is bad economics. Bad policies are bad policies. Is that so hard to understand? If it is, you’re in the wrong business.