The Casino Economy

Posted: September 28, 2008 in Economics, Politics

Rape me once, shame on you; rape me twice, actually still shame on you. That’s what the financial bailout looks like to me: a repeated raping of taxpayers in the form of looting the treasury of money not even yet there. Arms and legs indeed. There is lots of spilt ink on the bailout plan, most of which I don’t trust. However, Ran Prieur has a couple prescient points about the bailout plan on which I want to comment (here rather than on his blog since it doesn’t allow comments).

The point I expect to make over and over is that money is not wealth. The houses are still here. There are still farms to grow food and trucks to haul it to supermarkets. The challenge is to keep those systems going, or improvise replacements, through chaos and upheaval in the money system.

That money is not wealth is true in principle, but in practice, the process of rediscovery that wealth accrues to means of production and distribution would be a long and arduous one. If the immediate paper money incentive for bothering to work were eroded severely (through hyperinflation) or even wiped away, the bulk of the American population is unprepared to return to a mostly agrarian subsistence as occurred in Russia with the collapse of the Soviet Union. The tumult would be extraordinary.

I will be shocked if the $700,000,000,000 bailout does not pass, because it’s such a beautiful opportunity for a massive abuse ritual. On a spiritual level, the purpose of this world, or at least the purpose of this age of human society, is to seduce people into making an emotional investment in something they have no control over, and then torturing them with disappointment. If every ordinary American is outraged by the bailout, they have to pass it, just to grind our faces in our own powerlessness.

Funny how using all the zeros behind $700 billion makes a point without even trying. Jared Diamond wrote about the practice of tribute in tribal cultures. Today, we don’t really question funneling money to the rich, powerful, and famous because their riches, power, and fame function as circular justifications. The stakes today are also considerable greater than with tribal cultures. Riches and power in particular are being consolidated into the hands of a very few, which is quite unhealthy for both them and the rest of us. The comment that it has grown into a “massive abuse ritual” is accurate, I think, and it erupts periodically as an opportunity to remind us of our learned helplessness.

I’m not going to bother with who exactly all this money is being paid to, because if you take a step back, money concentration is just a symbol for power concentration, and power concentration has already reached its practical limits. We fear a society full of police and soldiers telling us what to do, but consider how inefficient that is, compared to a society where we do everything voluntarily. When the control system has to point a gun at you, you know it’s almost finished.

It’s yet unclear how much more central control the people — or sheeple, as they’re often called — will accept. Because the violence and intimidation is right now limited to a few agitators, demonstrators, and resident aliens, many Americans are either flatly unconcerned or believe that “those people get what they ask for.” So in fact, there’s considerably more excess possible before a practical limit is reached engendering inefficiency would convince Americans that they must act.

It’s actually a rather strange notion to me that concentrated power would founder on inefficiency, of all things, considering how fascism is legion through history for eliminating levels of bureaucracy and decision making. Despotic leaders determine a course of action and waive away objections and oversight, which makes the objective far more efficient. That’s the purpose behind sequestering the bailout plan from judicial or congressional interference.

What still amazes me is that our authorities believe that our imperiled fiat currency can be saved by doubling down and loaning into existence yet more worthless paper. This paragraph from the History of Fiat Money tells it clearly:

In a fiat monetary system, there is no restrain[t] on the amount of money that can be created. This allows unlimited credit creation. Initially, a rapid growth in the availability of credit is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices. In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit. This expansion in credit can be seen in the Debt/GDP ratio.

As we watch, our leaders are restructuring the economy along the lines of a casino to benefit a few big winners at the expense of an awful lot of losers. Those running the casino, of course, always get their skim. And in the mad rush to keep credit available, they are asking the public to accept ownership of a staggering IOU, which is literally money that doesn’t exist (fiat money) but can simply be put on the taxpayers’ tab. They have also convinced a credulous public that the best way of either making a killing or saving for retirement is by putting one’s money at risk in one scheme or another. It might be housing, stocks and bonds, privatized Social Security, or a lifestyle financed by credit cards. The principal characteristic is that players stand to lose their stake if things go south, which of course things have — but not before those operating the casino economy collected their fees, salaries, bonuses, and severance packages and leave their financial institutions in ruins and insolvency. It’s rigged for failure.

For a perspective from outside the U.S., see Lehman and the End of the Era of Leverage by Spengler, published in the Asian Times, which contains some very interesting characterizations of recent economics, both the restructuring of the last few decades and recent collapses. I won’t quote the entire thing, but a few paragraphs are especially worthwhile.

An enormous hoax has been perpetrated on global financial markets during the past 10 years. An American economy based on opening containers from China and selling the contents at Wal-Mart, or trading houses back and forth, provides scant profitability. Where the underlying profitability of the American economy was poor, financial engineering managed to transform thin profits into apparently fat ones through the magic of leverage.

The income of American consumers might have stagnated, but the price of their houses doubled during 1998-2007 thanks to the application of leverage to mortgage finance. The profitability of American corporations might have slowed, but the application of leverage in the form of mergers and acquisitions financed with junk bonds multiplied the thin band of profitability.

Spengler uses the word hoax, whereas I prefer the word swindle.

There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear.

The world kept shipping capital to the United States over the past 10 years, however, because no other market could absorb the savings of Europe and Asia. The financial markets, in turn, found ways to persuade Americans to borrow more and more money. If there weren’t enough young Americans to borrow money on a sound basis, the banks arranged for a smaller number of Americans to borrow more money on an unsound basis. That is why subprime, interest-only, no-money-down and other mortgages waxed great in bank portfolios.

This describes an international financial crisis rather than a principally American development that infected everyone else. If we’re all in this together but America turns out the culprit that wrecked the global financial system, what will happen when, for instance, Chinese and Arab investors (in many cases, governments) finally admit (while we adamantly refuse to) that the American dollars they own are essentially worthless? Will it dawn on someone to exact some revenge? To put a finer point on it, are we unwittingly in a struggle to protect ourselves in the event an angry world decides we’ve gone too far?

  1. The purpose is just simple – never predict money so you might end up foreseeing more successful outcomes. It also gives you the ability to test out the purpose. The purpose is applicable to The stakes.

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