When I was in university, my fellow economics students were a rowdy bunch. Most were business science majors who had to take Econ 101 and 202 for the degree. Unlike a few others and me, they saw studying economics as a burden rather than enlightenment.
On one particularly raucous morning — the university rugby team had probably beat our archrivals over the weekend — the lecturer was covering the role of banks in the economy. He recited the old trope about recycling household savings into productive investment via lending. But his heart obviously wasn’t in it.
One of my fellow economics majors, who tended to congregate in the middle row, raised his hand. “Professor, I read an article of yours where you argued that what you just said was too simplistic and concealed the inherent dangers of the banking system. Why don’t you teach us that?”
My professor paused, a little ironic smirk on his face. “Because they won’t let me,” he said.
When it comes to the real and terrifying role of modern banking and debt, “they” still won’t.
You Can’t Eat It, Folks
Right next to the Department of Economics at my university was the Department of Political Studies. (Unlike American universities, South African universities rejected the notion that it could be a “science.”) Paradoxically, it was in its seminar rooms where I was introduced to the works of “forbidden” economists … like Karl Marx.
Marx gets a bad rap, partly because of his ideas and partly because of what was done in his name during the 20th century. But some of those ideas are quite useful as long as you can put them in proper context.
One of those ideas is the “money fetish.” In anthology, a fetish is an inanimate object worshiped by primitive peoples for its supposed magical powers. Marx argues that in our modern economy, people treat money as if it has magical powers of its own — intrinsic value — even though it is just a claim on real goods and services. This obscures the fact that money is just a socially constructed convention that mediates what really counts in life — real people producing real things of useful value.
If there aren’t any real things to buy, money is worthless.
Show Me the Money
To me, this is the ideal way to understand the modern global economy.
The International Monetary Fund recently warned that global debt has hit an all-time high of $152 trillion. That’s nearly twice the size of the global production of actual goods and services. The world’s debtors will need to produce real economic value — goods and services people want and can afford to buy — of twice the size of the world’s output to pay off all their debts … before they can even start accumulating wealth of their own.
The funny thing is, though, that the world’s biggest financial institutions continually create new money out of thin air by trading and speculating on this global pile of debt. Every dollar of that $152 trillion is an asset to a creditor who can use it to generate paper “profits.” Our best and brightest brains are devoted to conjuring ever more complex derivatives and other devices to make paper money from other paper money … all without creating anything humans can actually eat, wear or otherwise use.
The Economy: Something’s Gotta Give
The creditors who are owed the world’s debt — the world’s top bankers — are among the richest people on the planet … the top 0.01%. Most of that wealth is in the form of shares of the financial institutions they run. The market capitalization of those institutions is in turn determined by how well the bankers play the game of money creation. The more money they can conjure by speculating on other people’s debt, the bigger the bankers’ fortunes.
At least on paper, that is. Imagine, if you will, that those bankers decided actually to use the “wealth” they claim to have by buying goods and services with it. They’d quickly discover that the planet doesn’t have enough of what they’d probably want to buy. If they tried to buy it anyway, prices would skyrocket, devaluing their wealth through inflation.
That’s why mega banks are addicted to speculating on the world’s debt pile. There’s nothing else to do with their “money.” Real people can’t afford to buy goods and services. Real companies don’t want to borrow money to invest because there aren’t enough potential customers with money to buy their output. So those companies borrow money from banks to repurchase their own shares, artificially inflating their value … again, without creating anything tangible anybody can actually use.
And that’s what’s behind the current stock market bubble … nothing more than fetish — value without substance.
Pop Goes the Weasel
We tend to focus on government debt because it’s politically expedient that we do so. It keeps us asking the wrong questions of the wrong people.
I’m convinced that the true threat to the world’s economy — and to your own wealth — is the self-reproducing pile of global private debt that’s unconnected to real, tangible goods and services. Sooner or later, everyone is going to recognize that this debt has no actual value because there’s nothing it can make or buy in the real world.
The emperor of global finance has no clothes. That’s why Bauman Letter readers keep asking me how to avoid the inevitable bursting of this massive bubble. That’s why I sought and found someone who could design a portfolio that could beat it. It’s why I created the Smart Money Alert service.
In backtesting, Smart Money Alert beat the 2008 financial crash. I’m convinced it will beat the next one too.
Editor, The Bauman Letter