It is so engrained in us to think and speak of ‘the economy’ that we are, I think, having trouble seeing that there no longer is just one economy. There are two. Finance and the rest. They are, of course, still joined. But increasingly the Financial world has ceased to be a partner. It has become instead, a parasite.
The point of change, from one to the other, came when investment and lending became far less important than parasitical speculation. What has brought on the change at this time, though the necessary conditions have of course been incubating for a while, is the fundamental change in the balance of power between national governments and finance.
We do not talk of ‘too big to fail’ in terms of nations but of banks. That fact carries traces of the shift in power.
Nations can restructure – though the financial world would rather they did not. But they can and will. But the banks and their bond investors will not suffer that impoverishment to happen to them.
So the work being done now, is to somehow circumscribe any national default from affecting banks. The banks want to be assured that impoverishment and austerity will be contained and confined to nations and their citizens and not affect banks and their investors. These are the two economies, the two worlds, now dividing. And so, National bail-outs so far, have actually been bank bail outs by proxy. Bail out Greece to prevent Credit Agricole and a couple of German banks from imploding. Bail out Hungary to stop Austrian and Italian banks from sinking.
What has given finance its autonomy has been the huge infusion of bail-out cash. That money has given banks the ability to make profits entirely in their own world without the need to reference or interact with the real world. I am not saying they are detatched completely or that this separation will work in the long term. It might and it might not. We are in a moment when the creature is metamorphosing.
It hasn’t happened, past tense. It is happening, present tense. Look at the real economy. Yesterday these figure were in the financial news.
The Baltic dry index was down AGAIN, this time by another 4% down. That makes the 31st day in a row of decline taking it down to where it was in ’09, which at the time was described as a ‘generational’ low. 1 year is a pretty short generation! It’s like ‘freak’ weather events. Generational events are the new norm.
Anyway, the Baltic Dry is one of the purest measures of future economic activity. It measures the actual tonnage and price for moving that tonnage, of raw material being shipped from producer to manufacturer. The index clearly says less and less is being ordered. Lower orders – less economic activity.
Japanese machine orders were down 9.1%. That’s quite a drop. These machines are not gadgets but the machines that make the gadgets and cars. They are the machine tools that industry buys in order to make stuff we buy, from the raw materials. 9.1% down fits well with the Baltic Dry index.
And in the US, at the other end of the economic chain, US consumer credit figures paint a painful picture in all respects. Consumer credit has contracted in 18 of the last 20 months. Both credit card and longer term debt contracted. Together by $9 Billion in May alone. Spending 9 billion less in May, than the month before, means there just isn’t any consumer growth.
On the other hand you might search for a glimmer of positive news in this, and at least note that the consumer is finally paying off a little of their huge debt overhang. Sadly its a very little bit off a very large over hang. The US consumer still has $2.4 Trillion in debt to pay off. That is a massive weight bearing down on demand.
So borrowing and spending are contracting, sending strong signals back down the real economy not to make anything, or ship anything, or invest in future productive capacity and therefore not to think about hiring anyone. There is no growth in consumption and there are no financial conditions appearing to encourage it in the near future. Quite the opposite in fact as austerity measures will crush demand lower still.
All that, plus any amount of other data on houses and repossessions and Commercial real estate paint a consistent picture. And that picture is why people who want more stimulus, in the US mainly, are getting hysterical.
In the face of these numbers, however, the question we have to ask is, how can there possibly be a rally in stock let alone a recovery? And yet for the past four days, on almost no positive news from the real economy stock markets have been rallying.
The fact that there was a market rally led each day by financial stocks, tells you that the people buying the stocks don’t think producing or consuming is germane to their profits or well being. They no longer think they need you to buy anything, for them to get rich.
And they are right. Think about the first quarter of this year when almost all th BIG US banks made profits every single day. A perfect scoring average. It will be intersting to see how close to perfect they still managed to be this last quarter.
How were those profits made? Well we know very little came from lending to consumers or industry. Most came from the trading desks. And the money they used to make those profits? The money the banks were using was basically bail-out money. We can say this because if we took all that government money away, the banks would have none and in fact be insolvent.
Now lets look at the markets in which the banks made their money. They made it in a stock market that is presently made of trades in a very small number of companies’ stocks and where the gains are being dominated by HFT trading against a background of low volume. We are seeing ramps and dumps. Profits are from two sources. A simple ramp where HFT traders trade stocks back and forth gradually pushing the notional worth up and up, and from sucking smaller traders in to a price increase before trading out, letting the price drop on the small trader, and then doing the same again in the morning. Smaller traders are increasingly angry at what they see as a rigged market. Both in stocks and bonds.
None of these trades needs input from the real economy. What the financial world does need to know, is that their grip on the politics of rates and Central Bank bail-outs is unconstested. As long as they feel secure that they are still in control of that, then the rest of the economy is of far less consequence to them. Unemployment figures might dampen the markets a little, but an article opining how there is still time to water down the ‘Volker rule’ in the now stalled and helpless financial regulation bill, is far more important. And when the ECB says it will continue to supply ‘whatever support its banks need for as long as needed’ you can watch the markets rise in response.
We have a disjunct in what finance needs and what the rest of us need. In many ways the two needs are diverging. So far the banks have uncontested control over the political process and its decisions. This is the new poltics of finance.
There are two economies, our and theirs. Theirs is in the process of trying to insulate itself from ours. A key part of making that separation work is for finance to gain and maintain control over political decisions. By owning our political class, by black-mailing national leaders with threats of systemic collapse and by maintaining too big to fail.
So far they are winning. They are not in the clear by a very long way. The double dip is still a threat. But we need to wake up, see the world for what it has become, understand the new lineaments of power and organize.