A World Without Finance

Authored by Charles Hugh Smith via OfTwoMinds blog,

We will enter a world without finance, and it will be a better world, for the economy will no longer be in thrall to the derangement and inequality of parasitic, predatory finance.

A world without finance is currently unimaginable, because finance is now synonymous with financialization. In this context, finance no longer refers to longstanding mechanisms that grease commerce such as short-term commercial debt (purchase orders, etc.) or long-term debt to finance the construction of new assets (mortgages, etc.)

A world without finance is unimaginable because the economy’s “growth” and soaring inequality are now totally dependent on financialization. Finance is no longer about greasing commerce and the construction of assets, roles it played for thousands of years; finance is now a vast skimming machine for the few to enrich themselves at the expense oof the many, a set of swindles that skims from what remains of the productive economy to benefit financiers, corporations and speculators.

In other words, finance is nothing more than a parasitic system that has wormed its way into every nook and cranny of the economy. Where finance represented a few percent of the entire economy in previous decades, it now accounts for roughly 20% of the economy: nothing but churn.

Finance sells its “services” as hedges, but this is merely PR cover for predation. Finance creates no real-world goods or services; it is a structure of exploitation that is more like a criminal syndicate than a sector of the economy.

Given its parasitic, predatory nature, it’s not surprising that finance is the primary engine of extreme wealth-income inequality. The fortunes of the few assembled over the past two decades largely trace back to the expansion of debt and leverage (i.e. financialization) which emphasizes marketing as consumption expands not from earnings but from the expansion of debt and leverage.

The problem is parasitic, predatory finance is inherently unstable, as it destabilizes the real economy by distorting every level of regulation and governance and deranges incentives to reward the least civic-minded, the least ethical and the sleaziest self-absorbed gamblers, those who demand a bailout when their private gains turn into private losses.

We’re too big to fail, they whine, and the naive public bought that fraud in 2008-09.

I predict a wholesale eradication of finance once the public digs its way out of the ashes of an economy burnt to the ground by financialization. Finance and central banking will be truncated, limited to the core functions of greasing commerce and the construction of productive assets. All the weaponry of parasitic swindles, all the skims and scams of derivatives, swaps, corporate buybacks, etc. will no longer be allowed. Speculative gains will be so heavily taxed that those seeking wealth will be driven to actually generate real-world goods and services rather than financial frauds.

Consider this chart of Industrial production and the S&P 500 stock market index, from 1924 to the present. (Courtesy of correspondent David E.) Note that stocks more or less tracked the ascent of industrial production until the dot-com bubble imploded in 2000–a point in time that introduced the dominance of financial bubbles and the offshoring of production, i.e. globalization, as the “generators of wealth” and inequality.

Finance has one “product”: credit-asset bubbles that ensnare and then lay waste to the real-world economy. The current bubble, The Everything Bubble, will be the last such bubble, as the diminishing returns of both financialization and globalization presage the end of their parasitic, predatory reign.

Note that while Industrial Production has been essentially flat for the past 20 years, the stock market has soared to new bubblicious heights of speculative frenzy. When the The Everything Bubble pops, there won’t be a bailout of the swindlers and scammers, nor will a new and larger bubble replace the one that collapsed.

We will enter a world without finance, and it will be a better world, for the economy will no longer be in thrall to the derangement and inequality of parasitic, predatory finance.

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