Wednesday, May 11, 2016

The Phrase of the Day

I mentioned reading The Scandal of Money by George Gilder at the start of the month, and continue reading when not working in the shop or doing any of the other things I need to do. Gilder has a fantastic phrase; as well as the title of his Chapter 10: The Hypertrophy of Finance

I wasn't immediately familiar with the word, but it is, as you'd expect, the opposite of atrophy.  Hyper growth.  Uncontrolled growth.  A more sensationalist or shocking term might be The Cancer of Finance.  He uses the term to talk about the incredible growth of the financial trading sectors in the wake of the crash of '01.  In this case, he writes about currency trading, where George Soros made his fortune.  Now, I've written about the distortions to the world caused by the central banks many times (example), so this resonates with me.  But Gilder presents some numbers that simply blew me away.  (All of this from Gilder, chapter 10)
Every three years, the Bank for International Settlements (BIS) in Basel, Switzerland, adds it all up on a “net-net” basis adjusted to nullify double counting from local and cross-border transfers between dealers. By this careful metric, BIS in April 2013 identified a flow of some $ 5.3 trillion a day, more than a third of all U.S. annual GDP every twenty-four hours. The 2013 total signified currency transactions throughout the year and around the globe at a rate of more than $ 600 million every second.
By various measures, 90 to 97 percent of all the transactions are judged to be “speculative,” devoted not to enabling trade in goods and services but to harvest profits and fees from arbitrage and leverage. Contrary to some claims, however, hedge funds are not the culprits. Only around one-tenth of the traffic in 2013 was ascribed by BIS to hedge funds and PTFs. Transacting some 77 percent of the business are ten leviathan banks in Western countries. These tolls and fees are burdens on global trade and economic growth paid by the production sector of the economy to the financial sector. But it is the sum of all these activities— hedging, speculation, and derivatives— that accounts for the oceanic span of liquid and available currency services.
Nonetheless, as one might suspect in the wake of the global crash led by the same big banks, the system is less than impeccable. The boom in currency traffic since 2001, 2004, and 2007 might imply that international trade was also booming. Trade in goods and services has indeed risen a total of 36 percent since the low in 2007, but currency trading has risen more than four times faster— 160 percent. After 2011, trade flattened out while currency trading continued to rise, up 32 percent since 2010. No unexpected swell of trade explains the expansion of currency exchanges.

Dominating the system utterly is the West. In the forefront of the foreign exchange operations are the United States and Europe, with London’s “City” alone accounting for 36 percent of all trading. Some 87 percent of transactions involve the dollar, in which 63 percent of all international trade is denominated and which accounts for more than half of all global reserves held by central banks to back their currencies. Since the economies of these leading traders in the West have failed to grow substantially, recovering from the slump but not moving on to significant new highs by 2016, currency trading and its effects constitute a substantial share of total growth.

That is what we mean by the “hypertrophy of finance,” which accounts for 35 to 40 percent of corporate profits. While trade in goods and services languishes, currency trading soars. Financial service finds its ultimate test in how it affects the rest of the economy. But currency trading has been rising at least twenty times faster than productivity growth.
Like Gilder, who quotes Milton Friedman, I think that currency trading is much closer to inherently good than bad; perhaps an evil made necessary by not being on a gold standard, but I had no idea that global currency trading amounted to 1/3 of the US GDP every day, and that number is three years old.  That's some serious growth going on there.  This is where the wealth transfer "from main street to Wall Street" (God, I hate that term) is taking place.  When you can show that since 2007 trade in physical goods and services increased 36 % while currency trading increased 160 %, it's easy to see which sector is making money.  The Too Big to Fail Banks are at the heart of this, making their "arbitrage and leverage" fees on every one of these trades.
Currency trading concentrates income and wealth in the government-linked financial sectors of Western economies, bringing about maldistribution that arouses envy and resentment and demoralizes capitalism.
The reason I hate the term "from main street to Wall Street" is that it hides what's really going on.  It implies Wall Street is taking money from the people on Main street.  To begin with, Wall Street isn't benefiting from this at all, if "Wall Street" is used in the sense of the stock markets.  A handful of very big banks are benefiting from this, and it's all being carried out by the central banks at the behest of the governments.  If those banks are traded on Wall Street, their share price may go up because of this, but that's the only benefit Wall Street gets.  Calling those big banks "Banksters" - a cross between bankers and gangsters - also misses the point.  Everything they're doing is not only completely legal, it's completely pushed by the governments.  When the root cause of your problem is big government and central banks, blaming it on Wall Street, or "the rich", as Madman Sanders does, is only helping to perpetuate the problem. 


  1. It kinda depends on the agenda of the individual writing or speaking on the subject. For example the point that it is the same big Western banks involved in this and the crash of 2008. The banks didn't cause the crash congress did and President Clinton of course signed the bills. it took a decade to crash but the cause was not the banks. The banks deal in mortgages and mortgages were the nexus of the 2008 crash. Next time it will be something else and if it involves money, loans and bonds the same banks will be involved in that too and more than likely they won't have caused that crash either. Generally the problem is the government either intentionally as in the crash of 2008 or unintentionally by passing excessive regulations and stifling the economy. The investor; the humans not in government simply do what they can to invest and profit in the market as it exists. Just imagine that you are hired to manage millions or even billions of dollars and banks and bonds are paying 1% interest (if you can even get that). So you look to other investments and try to beat your competitors. The result worldwide looks chaotic and the total worldwide is massive.
    As we speak I'm expecting the next crash, the indicators are there and the stage is set. It is likely that some of the things the big banks and money managers do will exacerbate it but not intentionally. It is simply the result of humans having the option of free choice in a market that is controlled or made more chaotic by governments/regulators.

    The next crash is imminent and when it happens the media will happily blame something whatever the powers that be want us to believe caused it and heads will roll and fines will be paid and we will all remain more or less ignorant of what really happened.

    1. Just imagine that you are hired to manage millions or even billions of dollars and banks and bonds are paying 1% interest (if you can even get that). Excellent summary.

      And you're absolutely right that congress caused the last crash - with the help of the Federal Reserve - and the same combination will cause the impending crash. In the case of '08, one of the main causes was the community reinvestment act from the Jimmy Carter days. In the case of the coming crash, one of the main causes will be Dodd-Frank. Supposedly, it was written to prevent the next crash, but I haven't found a single author who thinks it will. Instead, it formalized the TBTF banks (Too Big To Fail), which is another way of saying it Nationalized the banks without requiring the guts to say the government nationalized the banks.

      All the shenanigans the banks did to cause the last crash are still there. CDOs are still there. In fact, they're worse than before.

      But last night, as I was falling asleep, I told myself, "you should have said something about bankers who did really break laws, and that if they broke 'em, they should be in jail". So I just did.

  2. I would add that - although the majority of the manipulations may be legal - the control exerted by these banks certainly influenced the creation regulations and codes which _enable_ those manipulations, benefitting those banks.

    That also provides a true conflict of interest by the Congressmen who benefit from either direct payment or perks from those financial institutions, and/or by "riding the coattails" of the banks to increase their wealth ("insider trading", via currency trades or stock trades). They aren't merely benefitting from the serendipity of those regulations and laws, they influenced the creation of those regulations and laws in order to directly benefit themselves.

    In addition, just as it is a felony if we lie to government (agents), but only "politics" when they lie to us, so it is that "insider trading" is illegal for the citizen, but completely legal for members of Congress - scum who use their position to leave Congress as multi-millionaires.