Writing The Archdruid Report has its
pleasures, and one of them is the wry amusement to be had when some caustic jab
of mine turns into an accurate prediction of the future. Longtime readers may recall a comment of mine
late
last year to the effect that ordinary investors would surely find
some way to pile into the shale gas bubble before the next year was out. Thanks
to an anonymous reader and the August 2012 edition of
SmartMoney Magazine, which arrived from said reader in
yesterday’s mail, that comment can now be moved over into the
"confirmed" category.
The prediction, to be sure, didn’t require any particular
clairvoyance on my part. Its sources
are, first, a decent grasp of the history of economic stupidity, and second, a
keen sense of the levels of desperation in what we might as well call the
investmentariat, the people who have a little money and are looking for a safe
place to put it. The investmentariat has
been told for decades that their money ought to make them money, but nobody
told them that this only works in an economy that experiences sustained real
growth over the long term, and nobody would dream of mentioning in their
hearing that we don’t have an economy like that any more.
All the investmentariat knows for sure is that the kind of
safe investment that used to bring in five per cent a year is now yielding a
small fraction of one per cent, and the risks you need to take to get five per
cent a year are those once associated with the the kind of
"securities" that make a mockery of that title. The resulting panic
is SmartMoney’s bread and butter. Smart money in the old
sense—that is to say, the people who know what’s going on in the sordid and
scam-ridden world of investment—wouldn’t waste five seconds on such a magazine;
they know you can’t get any kind of advantage from something that a couple of
million people are also reading. No,
this is strictly for the investmentariat:
as glossy, glib, and superficial as a teen fashion magazine, and just as
unerringly aimed at the lowest common denominator of contemporary thought.
It will thus come as no surprise that the cover story on the
August 2012 issue of SmartMoney is "The Return of
Fossil Fuels," and that it rehashes the latest clichés about vast new gas
and oil reserves without raising any of the the inconvenient questions that a
competent practitioner of the lost art of journalism, should one be wakened
from enchanted sleep by the touch of a 1940s radio microphone, would ask as a
matter of course. The article trumpets the fact that America is importing less
oil than last year, for example, without mentioning that this is because
Americans are using less oil—unemployed people who’ve exhausted their 99 weeks
of benefits don’t take many Sunday drives—and it babbles about natural gas for
two largely fact-free pages without mentioning that claims about vast supplies
far into the future rely on assumptions about the production decline rate from
fracked shale gas wells that make professionals in the gas drilling industry
snort beer out their noses.
All this, inevitably, is window dressing for suggestions
about which stocks you should buy so you can cash in on the fracking boom. Last
I heard, it was still illegal for journalists to take payola for pimping
individual companies, or to speculate in the stocks they promote; still, I
trust my readers will already have realized that one set of professional market
players will get copies of the magazine the moment it hits the newsstand, snap
up shares in the companies promoted in each issue, and dole them out at
inflated prices to SmartMoney readers who get their
magazines later, while another set of professional market players will take out
short contracts on those same stocks as they peak, wait for the rush of buyers
to crest and recede, and cash in on the inevitable losses. Those are among the
ways the game is played—and if this suggests to you, dear reader, that the
readers of SmartMoney are not going to get rich from shale
gas by following this month’s tips, well, yes, that’s what it means.
This is business as usual in the financial industry, which
has made a lucrative business out of extracting wealth from the investmentariat
in various ways. This is part and parcel
of the broader and even more lucrative business of extracting wealth from
everywhere by every available means. The
question that might be worth asking here, and is rarely asked anywhere, is
whether the financial industry provides anything to the rest of the economy
commensurate with its immense income and profits. Any economics textbook will
tell you that companies raise capital by issuing stock, selling bonds, and
engaging in a few other kinds of transactions in the financial markets, and
that this plays a crucial role in enabling economic growth. Well and good;
there are many other ways to do the same thing, but we’ll accept that this is
the way modern industrial societies allot capital to new and expanding
businesses. How much of the financial industry’s total paper value has anything
to do with this service?
Let’s do some back of the envelope calculations. In 2010,
the latest year for which I could find figures, the total value of bonds issued
by nonfinancial businesses was $1.3 trillion, and the total net issuance of
stock by all companies was $387 billion—that includes stock issued by financial
businesses, but since this is a rough estimate we’ll let that pass. Total stock
and bond issuance in 2010 to support the production of real goods and services
was thus something less than $1.7 trillion; let’s double that figure, just to
leave adequate room for other ways of raising capital that might otherwise slip
through the cracks, for a very rough order-of-magnitude figure around $3.4
trillion.
In 2010, the total stock of debt and equity potentially
available for trading in financial markets was $212 trillion, and the total
notional value of derivatives that same year was estimated at $707 trillion.
Exactly how much of this was traded in the course of the year on all markets is
anybody’s guess—some stocks heavily traded by computer programs may change
hands dozens of times in a day, while other assets spent the whole year sitting
in a safe deposit box; still, this is back-of-the-envelope stuff, so we’ll use
the total value just listed as a very rough measure of the size of the
financial economy. We can round up a little here, too, to make room for forms
of wealth not included in the two categories just named, and estimate the total
paper value of the world’s financial wealth at $1 quadrillion, of which the
fraction directed into the productive economy in one year amounts to around a
third of one per cent.
Now of course providing capital to the productive economy is
only one of the things the financial industry does that’s arguably useful to
someone other than financiers. Local and national governments use the financial
industry to raise funds for public works, individuals borrow money for the
occasional useful purpose, and so on.
Let’s be generous, and assume that the amount of money that flows from
the world of finance for these purposes is double the total input of capital
into nonfinancial businesses via stocks and bonds. That means that in any given
year, maybe one per cent of the financial economy has anything to do with the
production of real, nonfinancial goods and services.
The rest? It consists
of ways to make money from money. That
seems innocuous enough, until you remember what money actually is. Money is not
wealth; it’s a system of abstract, culturally contrived tokens that we use to
manage the distribution of real goods and services. A money system can simplify the process of putting
energy, raw materials, labor, and other goods and services to work in
productive ways; that’s the reason we have money, or rather the reason most of
us are prepared to discuss in public. That’s not what the other 99% of the
world’s financial assets are doing, though. They are there to ensure that the
people who own them have disproportionate, unearned access to real,
nonfinancial goods and services. That’s the other reason, the one nobody wants
to mention.
Not that many centuries ago, across much of the world,
usury—lending money at interest—was considered a serious crime, more serious
than robbery, and was also classed as a mortal sin by Christian and Muslim
religious authorities; it’s no accident that Dante consigned usurers to the
lowest pit of the seventh circle of Hell. That’s been dismissed as a bit of
primitive moralizing by modern writers, but that dismissal is yet another
example of the way that contemporary industrial culture has ignored the
painfully learned lessons of the past.
In a steady-state or contracting economy, usury is a parasite that kills
its host; since the total stock of real wealth does not expand from one year to
the next, each interest payment enriches the lender but leaves the borrower
permanently poorer.
Only in an expanding economy can usury be tolerated, since
interest can be paid out of the proceeds of economic growth. Periods of sustained economic expansion are
rare in human history, since most societies live close to the edge of the
limits to growth in their bioregions; the exceptions, such as the late Roman
Republic and early Empire, usually involve the expansion of one society at the
expense of others. The late Roman
Republic and early Empire, it may be worth noting, had a large and very
successful moneylending industry, which fed on the expanding Roman state in
much the same way that the Roman state fed on the accumulated wealth of the
Mediterranean world. Only after Roman expansion stopped did attitudes shift, in
favor of a religion that was violently opposed to usury.
During the three centuries of their power, the world’s
industrial nations looted their nonindustrial neighbors with as much enthusiasm
as the ancient Romans looted theirs, but they had another source of
plunder—half a billion years of fossil sunlight, stored up in the form of coal,
oil, and natural gas. In effect, we stripped prehistory to the bare walls so
that we could enjoy an age of gargantuan excess unlike any other. One consequence was that our moneylending
industry was able to metastasize to a scale no previous gang of usurers has
ever been able to attain. The basic arithmetic remains unchanged, though: usury
is only viable in an expanding economy, and as the global economy enters its
post-peak oil decline, the entire structure of money that makes money is going
to come apart at the seams.
I’d like to suggest, in fact, that the unspoken subtext
behind the financial crises of recent years is precisely that the real economy
of goods and services is no longer growing enough to support the immense
financial economy that parasitizes it. The current crisis in Europe is a case
in point. Since the crisis dawned in 2008, EU policy has demanded that every
other sector of the economy be thrown under the bus in order to prop up the
tottering mass of unpayable debt that Europe’s financial economy has
become. As banks fail, governments have
been strongarmed into guaranteeing the value of the banks’ worthless financial
paper; as governments fail in their turn, other governments that are still
solvent are being pressured to fill the gap with bailouts that, again, amount
to little more than a guarantee that even the most harebrained investment will
not be allowed to lose money.
The problem, as the back of the envelope calculations above
might suggest, is that you can cash in the whole planet’s gross domestic
product—that was a little under $62 trillion in 2010—and not come anywhere
close to the value of the mountain of increasingly fictive paper wealth that’s
been piled up by the financial industry in the last few decades. Thus the EU’s strategy is guaranteed to fail.
EU officials are already talking about "haircuts" for
bondholders—that’s financial jargon for investors not getting paid as much as
their holdings are theoretically worth. Not so long ago, that possibility was
unmentionable; now it’s being embraced frantically as the only alternative to
what’s actually going to happen, which is default.
There’s been a lot of talk about that in the blogosphere of
late, and for good reason. No matter how you twist and turn the matter, Greece
is never going to be able to pay its national debt. Neither are Spain, Italy,
or half a dozen other nations that ran up big debts when it was cheap and
convenient to do so, and are now being strangled by a panicking bond market and
a collapsing economy. This isn’t new; most of the countries on Earth have
either defaulted outright on their debts or forced renegotiations on their
creditors that left the latter with some equivalent of pennies on the dollar.
The US last did that in a big way in 1934, when the Roosevelt administration
unilaterally changed the terms on billions of dollars in Liberty Bonds from
"payable in gold" to "payable in devalued dollars," and
proceeded to print the latter as needed.
That or considerably worse will be happening in Europe in the near
future, too.
A good deal of the discussion of these upcoming defaults in
the blogosphere, though, has insisted that these defaults will lead to a
complete collapse of the world’s financial economy, and from there to an
equally complete collapse of the world’s productive economy, leaving all seven
billion of us to starve in the gutter. It’s an odd belief, since sovereign debt
defaults have happened many times in the recent past, currency collapses are
far from rare in economic history, and nation-states can do—and have
done—plenty of drastic things to keep goods and services flowing in an economic
emergency. Partly, I suspect, it’s our
old friend the apocalypse meme—the notion, pervasive in modern culture, that the
only alternative to the indefinite continuation of business as usual is some
unparallelled cataclysm or other.
Still, there’s another dimension to these fantasies, which
is simply that the financial industry has done a superb job of convincing
people that what they do is important to the rest of us. It’s true, to be sure,
that having currency in circulation makes economic exchanges easier, and the
kind of banking services that people and ordinary businesses use are also very
helpful, but governments used to produce and circulate currency without benefit
of banks until fairly recently, and banking services of the kind I’ve just
mentioned can be provided quickly and easily by a government that means
business; in 1933 it took the US government just over a week, at a time when
information technology was incomparably slower than it is today, to nationalize
every bank in the country and open their doors under Federal management. The
other services the financial industry provides to the real economy can equally
well be replaced by hastily kluged substitutes, or simply put on hold for the
duration of the crisis.
So the downside of any financial crisis, however grandiose,
can be stopped promptly by proven methods. Then there’s the upside. Yes,
there’s an upside. That’s the ultimate
secret of the financial crisis, the thing that nobody anywhere wants to talk
about: if a country gets into a credit crisis, defaulting on its debts is the
one option that consistently leads to recovery.
That statement ought to be old hat by now. Russia defaulted
on its debts in 1998, and that default marked the end of its post-Soviet
economic crisis and the beginning of its current period of relative prosperity.
Argentina defaulted on its debts in 2002, and the default put an end to its
deep recession and set it on the road to recovery. Even more to the point,
Iceland was the one European country that refused the EU demand that the debts
of failed banks must be passed on to governments; instead, in 2008, the
Icelandic government allowed the country’s three biggest banks to fold, paid
off Icelandic depositors by way of the existing deposit insurance scheme, and
left foreign investors twisting in the wind. Since that time, Iceland has been
the only European country to see a sustained recovery.
When Greece defaults on its debts and leaves the Euro, in
turn, there will be a bit of scrambling, and then the Greek recovery will
begin. That’s the reason the EU has been trying so frantically to keep Greece
from defaulting, no matter how many Euros have to be shoveled down how many ratholes
to prevent it. Once the Greek default happens, and it will—the number of
ratholes is multiplying much faster than Euros can be shoveled into them—the
other southern European nations that are crushed by excessive debt will line up
to do the same. There will be a massive
stock market crash, a great many banks will go broke, a lot of rich people and
an even larger number of middle class people will lose a great deal of money,
politicians will make an assortment of stern and defiant speeches, and then the
great European financial crisis will be over and people can get on with their
lives.
That’s what will happen, too, another five or ten or fifteen
years down the road, when the United States either defaults on its national
debt or hyperinflates the debt out of existence. It’s going to do one or the other, since its
debts are already unpayable except by way of the printing press, and its
gridlocked political system is unable either to rationalize its tax system or
cut its expenditures. The question is simply
what crisis will finally break the confidence of foreign investors in the
dollar as a safe haven currency, and start the panic selling of
dollar-denominated assets that will tip the US into its next really spectacular
financial crisis. That’s going to be a messy one, since the financial economy
is so deeply woven into the fantasy life of the average American; there will be
a lot of poverty and suffering, as there always is during serious financial
crises, but as John Kenneth Galbraith pointed out about an earlier crisis of
the same kind, "while it is a time of great tragedy, nothing is being lost
but money."
It will be after that, in turn, that the next round of
temporary recovery can begin. We’ll talk more about that in the weeks to come.
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