This column is known for incessantly ranting about global economic imbalances, which have efficaciously led to extreme polarization between and within countries. In addition, this global economic regime systemically promotes destructive exploitative patterns in the realm of the natural. For example, June 2022 was the hottest month on record, globally, etc., etc.! Aspects of these gross imbalances were manifested in a mild global crisis, euphemistically called; ‘the financial crisis’ of 2007. Since then, instead of trying to solve the protracted problems of the world system, the useless palliative ‘kicking the can down’, was perniciously employed. But the can has now hit a massive boulder. Moreover, the can itself, from rolling down for quite a while, has accumulated too much dirt/mud and has become too heavy to roll. Is this it?
Stocks are crashing around the world. China is changing; it has allowed the Renminbi to be more flexible. The Chinese stock market has also gone down by almost 30% since its recent peak. China is now the largest importer as well as exporter of commodities and goods, respectively. When exports decline imports follow. Today they are having difficulties serving their debts. Their currencies relative to the dollar are going down south, very rapidly. Currently emerging countries in South America and Asia are facing another debt crisis not very different from the early 1980s and late 1990s!
Debt is another of the major structural weaknesses of the current global system. Today no economy grows without accruing massive debt, in one form or another. Capital formation not coming from savings will ultimately prove worse than phony. Credit fuelled activities only encourage mal-investments across the world, not excluding the very poor countries like Ethiopia! The problem with debt is; when economic growth stagnates or even declines, the already incurred debt remains the same, exasperating existing payment difficulties. The other side of the debt coin is; the indebted cannot continue their usual shopping sprees! When consumption declines in the rich countries, economic decline follows, it comes with the territory. By extension, demand for commodities that go into the making of stuff will also decline; this is the vicious circle that is currently afflicting the unquestioned dogma of the perpetual growth model of the modern world system.
The culprit behind almost all the malaise of the global economic system is ‘fractional reserve banking.’ This is a system where banks perpetually create debt via credit (phony money), not only to make the usual ‘run-of-the-mill’ profit, but also to confiscate real wealth from the unsuspecting sheeple, including entrepreneurs! The more banks in an economy, the more the created debt (via credit), and the more the mal-investment. In the current system, unless banks create debt, they cannot exist, let alone make profit. Another consequence of this banking regime is; it abolishes the important concept of ‘price discovery’! Because of rampant money creation (out of thin air, via credit and ultimately debt) the value of goods/services become illusionary. Prudent money cannot exist in such an economic scenario. The whole world now operates in a fictitious money regime. Money created out of thin air abuses earned wealth and discourages honest economic activities!
Prudent money can come about only when banks lend money from their deposits. In this case, prices are solid, i.e., they are one and the same with clearing prices. Moreover, entrepreneurs are on solid ground and can operate rationally and logically. In our fictitious world of ‘fractional reserve banking’, a company’s share price or price to earning ration (P/E) can jump up and down by an astonishing percent, within hours and for no logical or rational reason. This happens because there is no prudent money in circulation and there is no real price discovery. Everything is speculation with phony money, mostly accessed by those connected to the financial spigot, compliment of crony capitalism! Unfortunately, situation also obtains in the poorer countries of the world, like ours. ‘The job of finance is to provide capital to companies. We do it to the tune of USD 250 billion a year in IPOs (initial public offering) and secondary offerings. What else do we do? We encourage investors to trade about USD 32 trillion a year (twice the GDP of USA). So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middlemen. It is a waste of resources.’ John Bogle, founder of ‘the Vanguard Fund’!