Is This What Has Been Happening?

I found former Greek finance minister Yanis Varoufakis’s account at Project Syndicate of world economic history over the last half century interesting:

A half-century long power play, led by corporations, Wall Street, governments, and central banks, has gone badly wrong. As a result, the West’s authorities now face an impossible choice: Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked.

For 50 years, the US economy has sustained the net exports of Europe, Japan, South Korea, then China and other emerging economies, while the lion’s share of those foreigners’ profits rushed to Wall Street in search of higher returns. On the back of this tsunami of capital heading for America, the financiers were building pyramids of private money (such as options and derivatives) to fund the corporations building up a global labyrinth of ports, ships, warehouses, storage yards, and road and rail transport. When the crash of 2008 burned down these pyramids, the whole financialized labyrinth of global just-in-time supply chains was imperiled.

To save not just the bankers but also the labyrinth itself, central bankers stepped in to replace the financiers’ pyramids with public money. Meanwhile, governments were cutting public expenditure, jobs, and services. It was nothing short of lavish socialism for capital and harsh austerity for labor. Wages shrunk, and prices and profits were stagnant, but the price of assets purchased by the rich (and thus their wealth) skyrocketed. Thus, investment (relative to available cash) dropped to an all-time low, capacity shrunk, market power boomed, and capitalists became both richer and more reliant on central-bank money than ever.

I’m not sure I disagree completely with his assessment although I don’t think it was quite as concerted as he implies. And he neglects to mention how European (German in particular), Japanese, South Korean, and Chinese mercantilism contributed to the problem. In other words, yes, it’s Wall Street’s fault but it’s not all Wall Street’s fault. Ben Bernanke didn’t need to use quantitative easing to try and goose the economy. The U. S. could have imposed steep tariffs on imported goods. Unions could have gone to the mat over, for example, buying auto engines from Japanese suppliers. There are lots of things that might have prevented the rise of China as well as lifting on the order of a billion people out of abject poverty.

At this late date what can be done? We can’t undo the last 50 years but we can start doing some things better. One thing we can do better is to stop the sophistry about “investments”. Speculating in the stock market may or may not be investing. It really depends. Buy and hold is more likely to be genuine investment than making quick profits buying and selling stocks is. Paying for journalism, psychology, and interest studies degrees isn’t investment, either.

Whether infrastructure spending is investment depends also. It depends on the utility of the particular project over its expected life. Bridges to nowhere are not investments. Neither are projects that are never completed. Is California’s high speed rail system an investment or just frittering money away? The project has been under way for more than a decade with zero real outputs at this point. There’s talk that one fairly short leg of it will be complete by 2023 but I’ve also read analyses that is a fantasy.

1 comment… add one
  • Drew Link

    “Speculating in the stock market may or may not be investing.”

    Only IPO’s. Otherwise its just providing liquidity. However, without liquidity you would get nothing like the level of investment we have. There is nothing riskier than an illiquid asset. This same phenomenon is why oil companies don’t run out and start building refineries when the government vows to put you out of business.

    “Buy and hold is more likely to be genuine investment than making quick profits buying and selling stocks.”

    No, its not. The underlying promise of liquidity is still the driving issue. Its just a longer holding period.

    “It depends on the utility of the particular project over its expected life. Bridges to nowhere are not investments.”

    Sure they are. They are just bad investments. There are plenty of those.

    The key concept is the commitment of new capital, not trading the securities evidencing the rights associated with that commitment. It may seem a fine point, but its not. Its fundamental. Think about it awhile.

Leave a Comment