Chapter two: Modern alchemists and the sport of moneymaking

Synopsis from the study guide:

'“Modern Alchemists and the Sport of Moneymaking,” looks at the reality behind Wall Street’s illusions and the variety of its methods for making money without the exertion of creating anything of real value in return.'

My summary

Since the credit collapse, banks are very reluctant to lend to each other. They don't trust each other.  What toxic assets does they other have, they seem to think.  Most traffic goes via the central banks. The banks also severely restricted credit (loans) to customers, including  business owners.

Business schools do not teach their students the nature of money. Can you believe it? Maybe their teachers don't recognize that "money is only an accounting chit with no existence or intrinsic value outside the human mind". 

Money is, or has become, a system of power. The more we get dependent on it, the more those who can create money and can decide who gets it can abuse that power to control us.

David tells us the story of John Edmunds, a finance professor in the USA. The latter wrote an article in Foreign Policy about the merits of securitization as engine of wealth creation and  how production of real goods and services is outdated.  He effectively was pleading for creating asset bubbles. Now, mind you, Foreign Policy is a respected magazine. The fact that they published this article shows how much perversion has crept into the minds of economists and financiers. This has become the logic of Wall Street. A highly flawed logic, as the subprime mortgage debacle has shown to all of us.

Inflating bubbles always burst. The next one to burst seems to be the debt bubble, whether in the USA or in Europe, or both of them.The finance world is out of touch with reality, and this costs us dear. The end of the misery is not in sight. It may wreak more havoc than it already has done.

Banks have a right to create money with  a keystroke and lend it out at interest. This makes it very profitable for them and makes Wall Street very powerful. This power should be limited, and used with great care. In chapter 7, David does discuss this further.

Then follows an important piece titled "from good debt to bad debt" that explains the logic of the debt-based money system. Savings from working people are used to invest in enterprises that contribute to society's pool of real wealth. This assumes that the benefits of this operation are shared equitably among those who contributed to it: savers, entrepreneurs, workers and governments (taxes; they provide infrastructure). Near the end of the 1970s, deregulation  (see Ch. 5) caused a transition from a servant system to a predator system, which is devoted to creating phantom wealth instead of real wealth (real products and services).

Consumer debt

"Money lent comes from an accounting entry, not from savings, and it is used to fund consumption, not production. The debt and the expectations of those who hold it grow exponentially, but actual production does not."

Well, do you own calculations: if you want to understand how fast exponential growth is, start with 1. Double this, you get 2. Double this, you get 4. Double and get 8. Double and you get 16. And so on. After 10 steps we reach 1,024.  

I described the exponential curve in my ebook. it is an insane growth pattern, never observed  for long in nature. It is unsustainable. An economy can never grow that fast. It would exceed the resources needed for that very quickly.

"Borrowing for current consumption is bad because it creates no new value and creates debts that can only be rolled over into ever-greater debt that the borrower has no way to repay." As is happening right now.

The language of self-deception: speculation is called "investment"; phantom wealth is called "capital". We fool ourselves by our use of language.

Wall Street's gain is "a net loss for the rest of society", because their "growing claims on the real wealth of society dilute the claims of others."
The social costs of this fall on all of us that have not the money to live "in splendid isolation from the resulting social and environmental breakdown".  

A wealthy class needs a servant class. The very rich profit from what rests of the world's real wealth. That is the current situation. The author points to an alternative to phantom wealth capitalism: a real market economy (Ch.3).

 

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