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Over-financialisation – the Casino Metaphor

Over-financialisation – the Casino Metaphor.

The casino metaphor has been widely used as a part-description of the phenomenon of over-financialisation. It’s a handy pejorative tag but can it give us any real insights? This article pursues the metaphor to extremes so that we can file & forget/get back to the football or possibly graduate to next level thinking.

What is the Financialised Economy (FE) and how big is it?

The FE can be loosely described as ‘making money out of money’ as opposed to making money out of something; or ‘profiting without producing’ [1]. Its primacy derives largely from two sources – the ability of the commercial banks to create credit out of thin air and then lend it and charge and retain interest; and their ability to direct the first use of capital created in this fashion to friends of the casino as opposed to investing it in real economy (RE) businesses. So the FE has the ability to create money and direct where it is used. Given those powers it is perhaps unsurprising that it chooses to feed itself before it feeds the RE. The FE’s key legitimate roles – in insurance and banking services – have morphed into a self-serving parasite. The tail is wagging the dog.

The FE’s power over the allocation of capital has been re-exposed, for those who were perhaps unaware of it, as we see the massive liquidity injected by the central banks via QE disappearing into the depths of bank balance sheets and inflated asset values leaving mid/small RE businesses gasping for liquidity.

By giving preferential access to any capital allocated to the RE to its big business buddies the FE enables those companies to take out better run smaller competitors via leveraged buy outs. By ‘investing’ in regulators and politicians via revolving doors and backhanders, it captures the legislative process and effectively writes its own rule book.

Five years after the 2008 crisis hit, as carefully catalogued by FinanceWatch [2], economies are more financialised than ever. If the politicians and regulators ever had any balls they have been amputated by the casino managers, under the anaesthesis of perceived self-interest. They have become the casino eunuchs. An apparent early consensus on the systemic problems of over financialisation has melted away into a misconceived search for ‘business as usual’.

Derivatives

Derivatives are one of the most popular games in the casino.

Over the counter derivatives, which are essentially bets on the performance of asset prices, stocks, indices or interest rates, have a nominal value (as of December 2012 [2]) of USD 632 trillion – 6% up from 2007 levels – and 9 times world GDP. If the world decided to stop living and buy back derivatives instead of food, energy, shelter and all the stuff we currently consume, it would take nine years to spend this amount.

OK – it’s a nominal value. Many observers believe (even hope) that its real value is a minute fraction of this, but the only way we will ever find out is if the derivative contracts unwind. That is, prompted presumably by some form of crisis, parties progressively withdraw from the contracts or fold. The regulators (and the FE itself of course) will do everything they can to prevent this from happening, including grinding the population into the dust via austerity, because while no-one knows who precisely holds the unwound risk, most will certainly belong to the FE’s top tier.

Many of these derivatives started life as sensible financial products. Businesses need to insure against an uncertain harvest, or hedge against uncertain currency movements. But only a small proportion of current holders now have an insurable risk. So whereas in the past you could say we insured against our own house burning down, now they bet on their neighbour’s house burning; whereas in the past we bet on our own life expectancy, they now bet on the deaths of others; whereas in the past we insured against currency losses we experienced in our own business transactions, now they bet on currency movements in general. What might be expected when there are incentives to burn your neighbour’s house down? Organisations have even purposely set up junk asset classes, had them AAA rated, sold them to outsiders and then bet on their failure.

Government & Politicians

Politics operates as a debating society in a rented corner of the casino. The rent is high but largely invisible to the populace. The debaters are themselves well off, at least in the U.S. they are [3].

Now the strange thing is that the government actually owns the casino, but they have forgotten this. For the last 40 years or so, they have asked the casino managers to issue all the chips. The government use the same chips to spend on public services, and require us all to pay taxes in those chips. Mostly they don’t have enough chips for all the services they provide, so they ask the casino managers for loans. The casino managers are happy with this, provided the government pay interest on the loan of chips. This hidden subsidy effectively funds the casino. It’s perverse because the government pays interest on money they could issue themselves debt-free.

It’s not entirely clear why the government thinks the casino managers are better at managing chips than they would be. Arguably the government is elected to carry out a programme and they should be the arbiters of the country’s strategic priorities, so there should be some strategic guidance over the way the chips are spent.

But the government is only here for five years, and the casino managers are here permanently. So perhaps they think it’s safer just to trust the casino managers to get on with it. When asked, the casino managers explain that they allocate chips according to ‘what the market needs’ and no-one quite understands why that doesn’t seem to include much real investment. In any case the government have forgotten that they could issue the chips themselves, and although prompted (e.g. [4]), have failed to show any interest in reclaiming that power. Occasionally they create a whole new batch of chips themselves (QE) – if they think the tables are quiet – but give them straight back to the casino managers. Maybe it’s too complicated for politicians. Many of them haven’t had proper jobs. There are a few civil servants who understand what’s happening, but most of them don’t want to rock the boat – they are here permanently too and have good pensions. They research for the debaters and have lunch with the casino managers. That keeps them quite busy enough, thank you.

The Real Economy

The Real Economy also operates from a corner of the casino. It’s hard to put an exact figure on it, but perhaps 3-5% of the overall floor space depending how you measure.

It’s a very important corner of the casino, but not for the reasons it should be. It should be important because it’s the place where food is grown, houses are built, energy for warmth and work is created and so on. But these precious things are taken for granted by the casino managers. They have always had enough chips to buy whatever they need – they issue them for God’s sake – and they think food, shelter and energy will always be available to them. Crucially though, they have also managed to financialise this remaining RE corner, and this ‘support’ is trotted out as a continuing justification for the FE’s central importance .

The RE corner has always included important social and cultural, non-GDP activities. The enormous real value of these activities is now being properly articulated and is spawning citizen-led initiatives (e.g. sharing economy approaches, basic unconditional income) but they are often presented as beggars who annoyingly keep petitioning for their ‘entitlements’ and generally clutter up this remote corner of the casino.

On the finance side, individuals and businesses are exploring ways of funding their future activity without going cap-in-hand to the casino managers. They are exploring peer-to-peer finance, crowdfunding, prepayment instruments and so on. What these initiatives have in common is the disintermediation of the casino. They provide ways for people to invest more directly and take more control over their savings and investments. Of course a new breed of intermediary is surfacing to broker and risk-insure these new models, and these new intermediaries can also be captured.

With transparency and short-circuit communication via social media though, there is definitely scope to do things differently. We must hope for progress because the casino managers have little interest in what’s going on outside.

The Planet – outside the casino

The planet outside is used by the casino in two ways – as a source of materials and as a dumping ground for waste.

The materials are not essential to the core FE which is all about making money out of money and needs nothing but ideas, a few arcane mathematical models to give spurious gravitas, and credulous or naive investors. But RE activity performs a valuable role for the casino managers – it provides them with an endless stream of innovative ways of using chips. The shale gas bonanza for example is apparently grounded in the real world need for energy, and is presented as such. Its significance to the FE is as another bubble based partly at least on land-lease ‘flipping’ [5].

Without an RE-related rationale/narrative, the FE might disappear up its own waste pipe as it re-invested/sliced-and-diced/marketised its own products to itself. So materials from outside the casino are important for the managers’ big corporate proxies in the RE.

FE-favoured RE activities also create lots of waste, some of which is toxic, and may eventually prove terminal, as it builds up. This fact is of little interest to the casino managers. There is a minor interest in waste-related financialised vehicles – carbon markets for example are a relatively new casino game – and in the slight impact on some of the FE’s RE-friends like big energy companies. But mostly the casino managers are too busy with their games and their chips. Occasionally a manager will wake up to the dangers and defect to the real world where they, somewhat perversely, carry more credibility because of their casino experience. A small minority of managers stay within the casino and try to gently modify its behaviour. This is portrayed as a healthy sign of openness; the casino is secure in the knowledge that their ways cannot easily be re-engineered.

Combating the casino’s influence

Essentially there would appear to be three possible lines of response for those who believe there should be more to life than casino capitalism. Marginalise, convert or destroy……

These approaches map on to the three ‘broad strategies of emancipatory transformation’ suggested by sociologist Erik Olin Wright [6] – interstitial, symbiotic and ruptural. I have a fourth suggestion/ variation of which more in a moment.

The challenge for interstitial initiatives is the sheer pervasiveness of the FE. There are few spaces left where the effects of the FE can be ignored. They may not be well understood, but whenever we pursue dreams, they pop up in front of us, usually as obstacles. Developments that are most heavily attacked by the FE establishment perhaps merit the most attention – community scale renewable energy, crypto currencies, co-ops, the sharing economy, and so on. The more these alternative directions are attacked as utopian or uneconomic the more we can be sure they offer promising interstitial opportunities.

Symbiotic opportunities may represent the triumph of hope over experience. Armed with the power of ideas, we back our ability to persuade policy makers and business leaders to change the game. The main challenges here are the arrogance of the powerful and the danger of being captured by supping with the devil. Vested interests generally feel secure enough that they don’t need to negotiate or even to spend brain power on listening and evaluating alternatives. If enough interest is manifested that symbiotic trial projects are begun, their champions can be captured by being made comfortable.

Ruptural alternatives come in a spectrum from those that would destroy business models to those that would destroy societies. They probably share the above analysis but differ in their degree of radicalism and disconnection from the main. The impact of FE-driven globalisation is beyond the scope of this article, save to note that its effects have unnecessarily radicalised whole populations making more measured responses more difficult to promote than they might have been.

The role of the internet and social media in progressing both interstitial and ruptural initiatives is significant. Most of the space to develop and assemble communities of interest and mission-partners is here, explaining why both are likely to experience increasingly determined attempts to capture.

The nature of one’s chosen response will be a matter of personal choice. We should not be judgemental of those who don’t have the will, energy or resourcefulness to play a more active role. We all suffer from our subservience to a dysfunctional system, some much more than others. The fourth response? Perhaps there’s some mileage in judo principles [7].

References

[1]: http://rikowski.wordpress.com/2013/12/12/profiting-without-producing-how-finance-exploits-u s-all/
[2]: http://www.finance-watch.org/
[3]: http://www.bbc.co.uk/news/world-us-canada-25691066
[4]: http://www.positivemoney.org/
[5]: “It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.” Art Berman quoted athttp://theautomaticearth.blogspot.ie/2011/07/july-8-2011-get-ready-for-north.html
[6]: http://realutopias.org/
[7]: http://judoinfo.com/unbalance.htm

Featured image: Luxor, Las Vegas. Author: David Marshall jr. Source: http://www.sxc.hu/browse.phtml?f=view&id=90604

Activist Post: No-Brainer Course In Derailing The Trans-Pacific Partnership

Activist Post: No-Brainer Course In Derailing The Trans-Pacific Partnership.

Heather Callaghan
Activist Post

If you don’t know what it is yet – that means it’s working. The secrecy, that is. But once Pandora’s Box is opened, there’s no putting anything back. It will go down in history as one of the worst, oppressive plagues to saturate the planet.

Like Spider Man trying to stop a train from going over with nothing but his strength and shooting threads; we are going to need all the Web we can get to stop the fast-tracking Trans-Pacific Partnership from running over us. Perhaps more aptly, it is a tangled web we’ll be left trapped in as prey if we do nothing.

Here’s a crash-course and the easiest approach – all guesswork removed. But first, here’s a sampling of what you can kiss goodbye if this mammoth piece of legislation goes through…

What’s left of our jobs, food safety, Internet freedom, natural medicine, small farming, choice in medicine, financial regulation, privacy and more. Basically, all your rights. It permeates every area of your life, it’s been ramrodded through the Senate, and the media is not saying anything. It grants the likes of Monsanto, Wall Street and other huge entities full reign with immunity.

Kiss any last American sovereignty goodbye and say hello to your new global crypto-corpocracy complete with international tribunals and the end of domestic law – from your newly refurbished prison cell, of course. After all, you clicked on the wrong Internet link! And your ISP was watching and reported you. In the near future, this article could be enough to jail me, ban my whole family from the Internet, have computers seized and delete the website. No more videos that piece other clips together, or anything that hints at “infringement,” no more fair use, so no more non-corporate news.

It’s been shrouded in secrecy, especially from the People and Congress, planned behind closed doors for years, and proponents are searching for sponsors to have the President push it through now that Congress is back from recess.

The Trans-Pacific Partnership n. 1. A “free trade” agreement that would set rules on non-trade matters such as food safety, internet freedom, medicine costs, financial regulation, and the environment. 2. A binding international governance system that would require the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and any other country that signs on to conform their domestic policies to its rules. 3. A secret trade negotiation that has included over 600 official corporate “trade advisors” while hiding the text from Members of Congress, governors, state legislators, the press, civil society, and the public.

Here’s your crash course link on the TPP. You’ll be ready for take-off in no time. They’ve made it that simple:

Expose the TPP

After being mind-blown and catching your breath, you can do the absolute easiest thing there is to do by using Twitter with the hashtag #NOFastTrackTPP (but wait, there’s more).

Don’t use social media? No problem, scroll down. For social media users, here are the easiest things you can do, besides sharing memes and links on Facebook. Share things to Reddit andStumbleUpon. Everyone should call their reps (below).

See the Twitter storm event – still going. Pull any memes – share. Only use this hashtag for social media:  #NOFastTrackTPP. Using other hashtags and adding more will split the trends.

Next, Tweet your little heart out to your reps and others. Easily find them by clicking the “Discover” button and typing “congressman” in the search. All their Twitter names appear. Find celebrities, they often re-tweet. Example: @repfitzpatrick or @RepBera

Example Tweet:

@RepBera NO to Fast Track Authority and TPP, or we will not re-elect!! ‪#‎NoFastTrackTPP‬

Here’s another: “Do NOT sponsor FastTrack! Vote NO on TPP! ‪#‎NoFastTrackTPP‬”

Some reps have stood against the TPP, so first you might want to see this:

Spank or Thank?

– OR –

Use a general message for everyone: “I will NEVER support the Trans-Pacific Partnership#NOFastTrackTPP”

Want to jump into the Twitter storm? Easy. Sign up at Twitter, it runs you through a few-second tour and you can figure out the rest, see Help, or ask friends. Use the hashtag #NOFastTrackTPP on Facebook statuses.

Non-Social Media Users:

Find all your representatives’ info/forms in one-click. Just click on your state:
Contacting the Congress

Or use this:
Call President Obama: 202-456-6213
Call your Representative: 202-225-3121
or Toll Free (877) 762-8762

E A S Y  S C R I P T:

(Breathe and talk slowly. You will do just fine. Be polite and confident.)

“Hi, this is (your full name). I am a constituent of Rep/Senator (name). I live in (name of city). I am calling to request that Rep/Sen (name) vote NO on Fast Track Authority. It is important to me that Congress follows the Constitutional directive to negotiate international trade and that all trade agreements are given full consideration, debate and amendments as needed.

Do you know Rep/Sen (name) position on Fast Track Authority? Will he/she vote Yes or No? (wait for an answer)

Do you know Rep/Sen (name) position on the Trans Pacific Partnership Agreement? Will he/she vote Yes or No? (wait for an answer)

(regardless of their response, just continue)

Once again, I am requesting that Rep/Sen (name) vote NO on Fast Track Authority and NO on the TPP! Please be sure he/she gets my message. Thank you.”

Go to the Crash-Course site and print off PDFs to share. Actually, that whole website is designed to help you take action, online and off. You can still share the hashtag in any way you choose – it gets the point across fast.

URGENT:

If you can target these two reps, you could stop the fast-track today:

1) MIKE QUIGLY (IL-05)
D.C. 202-225-4061
District: (773) 267-5926
Twitter: @RepMikeQuigley
https://www.facebook.com/repmikequigley

2) GREG MEEKS (NY-05)
D.C. (202) 225-3461
District: 347-230-4032 & 718-725-6000
Twitter: Gregory Meeks
https://www.facebook.com/gregorymeeksny05

Lastly, if you have done something, no matter how small to derail the TPP fast track – THANK YOU!!

Special thanks also to Andrew Pontbriand, Emily Laincz and Nick Bernabe for their tireless organizing, efforts and information  – and to all those who joined them. Without them, this article wouldn’t be – nor will it with the TPP!

The smallest action is bigger than the greatest intention.

 

Heather Callaghan is a natural health blogger and food freedom activist. You can see her work at NaturalBlaze.com and ActivistPost.com. Like at Facebook.

Recent posts by Heather Callaghan:

QE Can Only End One Way

QE Can Only End One Way.

By Adam English    2013-12-31

Here we are, at the last day of a year that has defied all the odds.

The Dow and S&P 500 have posted out-sized gains in spite of what can generously be called tepid economic growth.

The regional governors and economists over at the Fed are undoubtedly enjoying the afterglow of their resounding success with the latest tapering announcement a couple weeks ago.

Investors, banks, and policymakers are most likely enjoying their holiday vacations while planning what to do with the fat bonus checks that are en route.

Of course, the disenfranchised poor are worse off than ever. Millions just lost their only source of money for food, and millions more are stuck in a downward spiral of debt traps and part-time work.

But these downtrodden masses don’t have any money to pour into the markets to boost gains. To the market and policymakers, they were only included when it came time to package self-enriching schemes in populist rhetoric.

Tomorrow, it’ll be time to start thinking about the next set of yearly returns, and none of the big players are worried.

Next year promises more of the same in their eyes. The Easy Money Battle of 2013 was won.

Unfortunately, many of them don’t see that it was a Pyrrhic victory. The cost is already too high to succeed in the end.

A Terrible Record

Clearly, the temptation in the market is to take the latest Fed announcement and ensuing rally as a call to double down on wildly bullish sentiment as 2014 starts.

I have little doubt that we’ll see this shaken out of the market sometime in the first half of next year. When you take a look at the Fed’s record on tapering announcements, it doesn’t look good.

By my count it has one win, one tie, and five losses.

The first mention of winding down QE programs came back on May 22nd. Hints of a reduction in stimulus measures in the Federal Open Market Committee (FOMC) minutes caused an immediate 1% drop in the Dow and a volatility spike.

On June 19th, there were no taper hints. Ben learned his lesson. However, the markets still knew it was imminent. The Dow closed down 1.3% while the S&P 500 fell 1.4%.

July’s announcement caused a 0.7% drop for the Dow and another volatility spike.

September was an aberration and a virtual tie because the government shutdown distracted everyone.

October saw no date set for a taper. There was some volatility and a slight dip in the markets for the afternoon.

Then on December 18th, the November FOMC minutes were released, causing a 290-point gain in the Dow and exuberant front-page headlines.

It’s clear the Fed’s record is pretty abysmal, filled with fumbles and confusion. But the trend appears to suggest that the markets have made peace with the idea. At least on the surface.

So what changed over time?

The overall tone of the statements and Bernanke’s remarks suggests that the Fed is still very “dovish” and willing to err on the side of caution. That helped, but it isn’t enough on its own.

In reality, the folks at the Fed spent the last half-year scratching their heads trying to figure out how to make a taper palatable to the markets. The result was a massive concession in how the taper would proceed.

The Fed now intends to hold interest rates at historic lows past the point when the unemployment rate falls to 6%. This is a large adjustment — over 1% lower than in earlier statements.

The flow of easy money into corporations has been extended through most — if not all — of 2014.

Wall Street could take or leave the $10 billion per month trimmed from bond purchases as long as the virtually free money guaranteed by low interest rates keeps flowing with no real end in sight.

Corporate Cash Cow

The rate banks pay on overnight loans, or the federal funds rate, was at 4.5% in late 2007. As the recession bit into the economy, it was slashed to 0.25% and has stayed there ever since.

Long-term rates quickly followed suit and fell from over 5% in 2007 to record lows near 1.5% in the second half of 2012. Since the beginning of 2013, 10-year Treasuries have crept back to 3%, still well below normal levels.

Corporations capitalized on the low interest rates by issuing $18.2 trillion of bonds worldwide since 2008. Currently outstanding corporate debt has risen over 50% to $9.6 trillion over the same period.

Many of these loans were simply created to push corporate debt obligations out as far as possible. Instead of using them to create growth, it just delays loans from maturing until 2017, 2018, or 2019.

Interest paid by U.S. businesses peaked in 2007 at $2.83 trillion, and then it fell sharply to $1.34 trillion in 2011, the last year data is available from the St. Louis Fed.

At the end of the recession in 2009, companies listed on the S&P 500 paid roughly $4 a share in interest per quarter. Now, they are paying around $1.50 a share in interest on average.

These dramatically lowered interest rates account for an estimated 50% of total profit growth, not including indirect savings from lower leasing or rental costs.

Stock buybacks using debt-fueled funding have also been very popular and have provided quick boosts to stock prices and created earnings per share increases that are not based on growth or performance.

In fact, earnings have tripled since 2000, back when the economy was in far better shape.

The Fed has created a massive boom for corporate America through historically cheap debt and that is what the markets wanted to keep most of all. The Fed capitulated and the markets rejoiced.

Meanwhile, the EBITDA margin (earnings before interest, tax, depreciation, and amortization divided by total revenue) operating profitability peaked at 25.6% in late 2007 and recently fell below 20%.

Of course, this can’t possibly last in perpetuity. Debt will become more expensive, and payments will eat into profit margins.

We have not seen the last time the Fed will disappoint markets, create a volatility spike, and ultimately drive losses for investors.

Still On Shaky Ground

Going forward, the Fed and anyone in the market have a handful of things to remember that should temper the irrational exuberance we’re seeing in the market.

First, Fed policy is overly dependent on creating artificially high asset prices to alter economic behavior for investors and companies. The economy has not substantially improved enough to subsist on meaningful corporate growth, consumer spending, or housing sales.

Secondly, the impact of easy money through abnormally low interest rates is hard to quantify, especially in the short-term. Bullish markets that overextend their gains on very uncertain stimulus will inevitably see very disruptive corrections.

Finally, the Fed is not the only central bank that is actively pushing asset prices higher and fighting to maintain economic and financial stability. China, Japan, and Europe are all using extraordinary measures to intervene.

If any of these major economies see demand that is too weak, experience corporate or bank liquidity and credit crunches, or fail to juggle sovereign debt, the domestic economy will take the full brunt of the blow.

The Fed has fully deployed all of its tools to spur growth while expanding its balance sheet by about $4 trillion with little real effect. Economists put the total return for the Fed’s intervention as low as 0.25% of GDP.

As we close the books on 2013 with large gains for the markets and on a high-note for the Fed, we know what to expect for now. The Fed will have to continue pushing you to put your wealth into the market, and the big players will keep holding the rallying market hostage as they rake in massive profits.

However, the cost has been too high. The Fed may push the day of reckoning well into 2014 or beyond, but there is no way around the correction and burden it will place on us all.

Take Care,

Adam English

Adam English

Jim Grant Warns America’s Default Is Inevitable | Zero Hedge

Jim Grant Warns America’s Default Is Inevitable | Zero Hedge (FULL ARTICLE).

There is precedent for a government shutdown,” Lloyd Blankfein, the chief executive officer of Goldman Sachs, remarked last week. “There’s no precedent for default.”

How wrong he is.

The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.

Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts.The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen….

 

Harper Government Media Monitoring: Opposition Accuses Tories Of Spying On MPs

Harper Government Media Monitoring: Opposition Accuses Tories Of Spying On MPs.

 

Fed Seen Slowing Stimulus With QE Cut by End of This Year – Bloomberg

Fed Seen Slowing Stimulus With QE Cut by End of This Year – Bloomberg.

Neil Macdonald: The secretive world of printing money – World – CBC News

Neil Macdonald: The secretive world of printing money – World – CBC News.

20 Signs That The Next Great Economic Depression Has Already Started In Europe | Zero Hedge

20 Signs That The Next Great Economic Depression Has Already Started In Europe | Zero Hedge.

Saudi minister: US to remain energy dependent – Americas – Al Jazeera English

Saudi minister: US to remain energy dependent – Americas – Al Jazeera English.

Climate change reduces US food production – Americas – Al Jazeera English

Climate change reduces US food production – Americas – Al Jazeera English.

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