Debt Deflation

Part II

Today, the finance, insurance, and real estate (FIRE) sector has regained control of government, creating rentier economies. The aim of this postindustrial finance capitalism is the opposite of industrial capitalism as known to nineteenth-century economists:

Seeking wealth primarily by the extraction of economic rent, not industrial capital formation instead it is tax favoritism for real estate, privatization of oil and mineral extraction, banking and infrastructure monopolies add to the cost of living and doing business. Labor is increasingly exploited by bank debt, student debt, and credit card debt while housing and other prices are inflated on credit, leaving less income to spend on goods and services as economies suffer debt deflation.

If you’re looking at how wealth is accumulated, people think of it in the way textbooks describe: as earning income and saving it up to get rich. That’s all most wage earners can do. But that’s not how it happens at the top of the pyramid. Most wealth takes the form of capital gains. They’re inflated on credit, so it’s really asset price inflation that’s financed by debt leverage. Most of the gains end up being paid out as interest, so the bankers – that is, the bank owners and bondholders – end up with most of the rise in wealth.

But to look at academic economics, it’s as if the whole economy is about making things – as if manufacturing hires labor to produce goods and services that everybody gets rich from, by being more productive. Savings are supposed to finance growth, increasing stock prices because profits go up from employing more labor to produce more goods and services.

But that’s not what really happens. Most money is made by financial engineering, not by industrial engineering.

 

It’s made by what the classical economists 

called 

unearned income. 

80% of bank loans are to the real estate sector.

The more loans banks make to the real estate sector, the more their credit bids up real estate prices. People think that real estate goes up because population growth and people getting richer to afford paying more. But that’s not really why housing prices are rising. The value of a home or commercial office building is worth whatever a bank is willing to lend against it. As banks loosen their lending standards, they lend more and more. The result is debt pyramiding – and this is true not only for real estate, but for the economy as a whole.

But the FIRE sector’s rent and interest are the first things you have to pay out of your paycheck. That’s more real – in the sense of being most pressing – than goods and services. So when a family gets its paycheck, the taxes and the bank debts credit card debt they owe, and either their rent or their mortgage payment, often are automatically taken out of their check or bank account right off the top. Out of what remains, the average American wage earner only has maybe 25 to 30% of their income available to actually spend on the goods and services they produce.

So there’s a diversion of this income to pay the FIRE sector – a sector that classical economists hoped to minimize. They wanted to get rid of the rentier class. They wanted to nationalize the land, or at least tax away its rent. They wanted the government to be the public creditor, or at least for banks to make productive loans, not finance corporate share buybacks, corporate takeovers, or lend just to inflate real estate prices and make home buyers take on higher and higher debt levels in order to obtain housing.

Today, families entering the labor force are going to have to spend all their life working off the debt they need to take on in order to get an education to get a job, as well the debt they need to buy a car to drive to the job, and the mortgage debt for the house they need to live in to avoid rents going up and up. They have to spend all their life merely to pay their creditors, not to live better with more goods and services. Unlike serfdom, today’s workers can live wherever they want. But wherever they live, they have to produce value not only for their employers but also for the bankers.

These bankers (and bondholders) are the main exploiters today. So finance capitalism is overwhelming industrial capitalism. Instead of industrial capitalism evolving into socialism as was expected, it is retrogressing back to neo-serfdom and neo-feudalism. This is mainly because of the inability to bring debt within the industrial capitalist system to evolve into a socialist economy. That is what neoliberalism is sponsoring by financialization and privatization: the inability to make debt productive.

The economic textbooks […] depict a parallel universe backed by Orwellian euphemistic economics to make people think that somehow they’re going to get rich by borrowing money to buy a home that may rise further in price. The dream is to be a Donald Trump in miniature, to make money on the home as a real estate investment. Make money in the stock market by turning their money over to financial managers like Citibank, Goldman Sachs, or other companies that have paid tens of billions in fines for financial fraud.

 Till Next Time

DYI