In the process of rebuilding the USA after the Great Depression of the 1920’s and 1930’s, President Franklin D. Roosevelt exclaimed that: ‘The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.’
Just like the politicians of today, Roosevelt identified the evil role being played by the bankers and the clear imbalance of the economy in favour of chasing profits over improving society for all. Fine words, yet less than a century later and the gulf between rich and poor is even larger and the bankers wield more power than ever before. Politicians today threaten to curb the excesses of the financial sector, but this is mere hubris. The reality is that the financial sector is essential for maintaining the free-market capitalist model. Far from punishing banks, Governments have taken tax-payers hard earned money and taken their countries toward bankruptcy in order to support the banks. While banks are helped back to profitability, tax-payers are made to pay more tax and get paid less. Meanwhile welfare programmes, universities and pension funds are being raided to support the bank bailouts. During the period between 2008 and 2011 governments all over the world orchestrated a staggering transfer of wealth from their citizens to the banking sector. Like FDR before them, politicians will say whatever it takes to get elected while doing another when they are in office.
Our economic system is failing and for good reason. Free market capitalism is founded on the premise of perpetual growth, which is not a possible concept on a planet with finite resources. Above all, capitalism puts profit making first and foremost, ahead of society and the real needs of humanity. Capitalism is a great tool for extracting resources quickly and efficiently, but it has no palatable answers when those resources are depleted. At the heart of capitalism is a banking system that relies on the perpetual growth model, as banks lend money that they don’t have, in the hope that it will be returned several times over in the future. It is because banks have no confidence in the future that lending ground to a halt and the ‘credit crunch’ has brought the global financial system to its knees since 2008. The terrifying reality is that the entire basis of our modern civilisation relies on everyone believing in the lie, that the money flowing through our financial systems has a real value. When the credit crunch crippled the global economy, trillions of dollars were wiped out. How does such a vast sum of money simply disappear? Where does it go? The fact is that the money didn’t go anywhere, it didn’t exist in the first place. Even after the credit crunch, the world is playing with ‘virtual money’ that is not actually anchored to the real world today.
The modern financial system is a product of a vibrant banking system pioneered in Italy and mastered by the great British and Dutch trading nations. When money in the form of coins or paper first appeared in Europe it was either actually an object of value (such as gold or silver) or a paper note that represented actual objects of value stored safely in a bank vault. However over time it simply became more convenient to exchange the notes themselves rather than transfer actual gold and silver. Banks used the deposits of silver and gold to lend money in return for interest and over time they lent more money than they actually had in their vaults. The system worked so long as everybody didn’t want their money back at once. Today, money is not actually anchored to anything of value, it relies rather worryingly on faith in the system. When that faith goes, so does the value of the money. In the USA, the Federal Reserve requires that banks keep just 3-10% of their capital, leaving them to lend the rest, which in turn can get deposited in another bank and be lent out again.
The reality is that money is ‘invented’ on a massive scale in the real world, with banks generating vast sums of new money based on the creation and constant recycling of loans, going far beyond the real basis of the wealth. Banks even trade in the debts that they manage, with unscrupulous banks selling off high risk debt to other banks and investors. At some point someone has to pay for all the ballooning debt. When there is a high risk that the debt can’t be repaid it becomes ‘toxic’, instead of being an asset on a bank’s balance sheet, it becomes a liability. This is what brought down the biggest banks all across the world; when so called assets were at a key stroke classified as liabilities and vast sums of virtual money simply ‘vanished’ from the banking system. Every single country on this planet is spending money it does not have; borrowed from future generations that have not yet been born and that may never be exist. The system only works on the flawed hypothesis that the next generation will be richer than the one before, so is able to pay the debts generated today. The problem is that next generation, the young people of today, even in developed countries, are being dubbed the ‘lost generation’, emerging poorer and more debt ridden than their parents before them.
If you need further evidence that money is not actually connected to real wealth, simply observe the recent practices of central banks all around the world as they participate in ‘Quantitative Easing’ (QE) which is a fancy way of saying printing money. Except that money isn’t even printed, it is simply electronically typed into central bank’s balance sheet. It seems bizarre that money can be created in this way, but it is common practice for the world’s biggest central banks. This invented electronic money is then used to buy government debt or is lent to other banks thereby allowing the government to keep paying its bills and banks to keep functioning long after other banks and private investors have lost faith in them.
As we have seen, banks are essential for the capitalist system as they provide easy access to equity for businesses and individuals to invest in growth or buy goods and services. As a result of the credit crunch, banks are far more cautious about who they lend money to, which has had the result of applying the brakes to economy. Banks may lend money, but in order to function effectively they also require equity which they gain from depositors and investors. However, investors have been staying away from banks as they are seen quite rightly as a high risk investment. This has meant that financial institutions have had to pay a premium rate of interest just to get access to investment. This is the same for governments, Germany for example has recently raised money by selling debt at 0% interest as investors became more concerned with putting their money somewhere safe. By contrast Spain or Greece struggle to raise money at all, and have to pay high premiums that they can barely afford at around 6 or 7%.
This is where QE comes into play. At a key stroke the central banks can create money which they then use to buy assets, (such as government or banking debt) which has the effect of reducing the interest that governments and banks have to pay to investors. In practice the financial institutions have happily accepted the central bank’s cash but have done little to share that money into the rest of the economy, instead hoarding the money and paying down debts. This has led to central banks all over the world injecting even more invented money into the financial institutions. In the USA, the Federal Reserve created approximately $2.5trillion through QE. Similarly the UK’s Bank of England generated around $490billion to buy up the debts of the banks and government.
It might seem too good to be true; and it is. By creating additional money, the central bank is in effect devaluing the currency which means that savings are eroded and prices sky-rocket. Hyper-inflation has happened in the past (Germany during the Great Depression) and happens today (Zimbabwe). It can happen again with disastrous consequences. Today China and other Asian economies are busily snapping up the extra dollars, pounds and euros in the system as they try to keep their own currencies low enough to export their products to their main markets. The global economy is reliant on the continued growth of Asia, but that growth cannot be taken for granted as the financial crisis deepens and their main export markets stagnate. What happens when Asia can no longer buy vast quantities of dollars?
Our unsustainable growth has placed many of the poorest on the verge of disaster but even in the west, the cost of living is rising, the number of houses being repossessed due to bankruptcy is record breaking, and many tens of millions are losing their jobs. This is just the beginning as the slide into longer term decline was delayed by massive Government spending programs that have bailed out bad banks, helped people buy new cars and invested in new infrastructure projects. This spending has served to put many nations into great debt and developed nations from Iceland to Greece have come close to bankruptcy. At some point, the spending will have to come to an abrupt end as Governments tighten their belts and raise taxes.
Public sector cutbacks will have a negative impact that will ripple out into the wider economy as unemployment rises, peoples spending decreases and those who are still have jobs are burdened with higher taxation. These factors will starve spending on the high street. At best, the world economy will see a slow and painful recovery, but it is far more likely that the coming years will bring further economic woe across the globe. Unlike the Great Depression there will be no cheap oil to bail us out. Having utterly exploited nature’s great gift, we will have to pay the price in full.
One of the attributes of capitalism is that it is dependent on the need for constant growth, if growth slows or stops, the system fails. Employers have to cut production and this increases unemployment that in turn decreases demand and leads to further production cuts which in turn leads to further unemployment. At the same time wages slow or fall and people generally cut spending. It is a downward spiral that rapidly gets out of control and this is why unfettered capitalism can be so dangerous.