Today’s lesson in Economics is a critical examination of several popular myths surrounding economics and finance. These myths were recently put forth as truths in The Economist (and elsewhere). The article is a part of a “special report on the future of finance” from January, 2009.
- Myth: The failure of the financial system contributes to the problems everywhere else in the economy.
- Myth: Financial markets bring together borrowers and savers in order to best allocate capital in a productive manner.
- Myth: “Money” is just an agreement, worthless paper can be traded for real wealth.
- Myth: Good businesses are going bankrupt, jobs are being destroyed, wealth is vanishing before our eyes.
In an earlier post, I discussed an interesting component of this report which blamed (in part) the paradox of economic modeling.
When the financial system fails, everyone suffers. Over the past 22 months the shock has spread from American housing, sector by sector, economy by economy.
The system is engineered to boom, and bust, when it’s “working”, it’s causing problems that have yet to be revealed. It is utterly without consequence that this sort of suffering is masked by inflation, the so-called “hidden tax”, ravages the value of the standard unit of account, distorts the valuable information otherwise conveyed by the price mechanism, decimates savings and fixed incomes, and generally makes people dependent upon more inflation in the future, in quite the same manner as an addiction to heroin causes the junkie to seek ever more powerful doses of the drug. In short, when the financial system “works”, ordinary people become slaves: to credit, to debt-money, to the system itself.
Financial services are supposed to bring together borrowers and savers. But as lending markets have retreated, borrowers have been stranded without credit and savers have seen their pensions and investments melt away. Financial markets are supposed to be a machine for amassing capital and determining who gets to use it and for what. How could they have been so wrong?
Financial markets are supposed to work like this, yes. They’re supposed to match time preferences and risk preference. They’ve been “so wrong” because the primary raison d’être of modern financial markets is not to bring together borrowers and savers. The primary purpose of modern financial markets is to concentrate real economic power for the State and its privileged beneficiaries (or if you prefer, its puppet masters, it makes no difference to me). The fiat credit money to which we’re all accustomed does not depend on “savings”, it depends on misdirection, deception, and trickery.
Real wealth doesn’t just disappear. That violates the laws of thermodynamics. Insofar as it appears to have vanished into thin air, it has merely been siphoned away from the productive sectors of the economy, via the financial markets, to the parasite class.
Money itself is just a collective agreement that a piece of paper can always be exchanged for goods or services.
I previously chided The Guardian, another British paper, for propagating the same falsehood. Money proper is accumulated weatlh, it is a tangible store of value or a legitimate claim thereto. Fiat money—printed (or computed) into existence from nothing like the Christian God willed into being the Heavens and the Earth—pieces of ornate paper which one is obliged to accept and remit to his government for the satisfaction of taxes due, are the modern chains of bondage.
We’re painfully relearning the fact that real wealth can’t be willed into existence from thin air, by loose monetary policy. We’re learning that in order to create wealth, nothing is a substitute for honest savings and capital accumulation: sacrificing a little in the present for more in the future. Jobs are being eliminated, payrolls are being reduced because a vast quantity of phantom wealth, upon which these things were created, has evaporated.
Everywhere good businesses are going bankrupt and jobs are being destroyed
Describing the process as “destruction” is not entirely accurate, but it is far more accurate than appealing to the mysticism that jobs have simply and miraculously disappeared without reason. Jobs are not being mysteriously destroyed, they’re being revealed as having been destructive. It is not “good businesses” that are going bankrupt, the “good businesses” never existed in the first place.
We’re not currently witnessing the destruction of industries or of economies. That havoc has already been wrought. What we’re seeing now is evidence that the destruction occurred, as if the piles of the foundation, and steel frame of a giant skyscraper were secretly withdrawn in the middle of the night. The structure may hold precariously on its own, and to the casual observer, nothing appears out of place. But it is only a matter of time before the building “pancakes”, collapsing under its own weight.
None (or practically none) of the “wealth” which drove “growth” in recent years ever existed in the first place: every hour of labor, every ounce of material resources consumed in the preponderance of the growth charade, was economically destructive. What we can see is merely the evidence of the destruction; the actual destruction, wrought unseen, is the resources and labor squandered, the jobs that never existed, the products never created and the services never rendered.