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.
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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.