Money for Nothin' and ...

Whether you are a business mogul, a politician, or a rocker… Whether you play the guitar, the lottery, or the speculative markets of high finance the American cultural "winners' game" is pretty much the same, caputured well by lyrics from Dire Straights:

Now look at them yo-yo's that's the way you do it
You play the guitar on the MTV
That ain't workin' that's the way you do it
Money for nothin' and chicks for free

Some of us are pretty tired of it. The whole game of "money for nothin'" and "work avoidance" as a cultural "good" are foreign to principles on which effective culture must be based. A few weeks before he was assassinated, Gandhi had a conversation with his grandson Arun wherein he outlined "Seven Blunders," out of which, said Gandhi, grows the violence that plagues the world. To his grandfather's list of seven blunders Arun later added an eighth, "rights without responsibilities" that is far too pervasive today. The blunders are:

• Wealth without work
  
• Pleasure without conscience
• Knowledge without character
• Commerce without morality
• Science without humanity
• Worship without sacrifice
• Politics without principles
• Rights without responsibilities

Gandhi called these disbalances "passive violence," which fuels the active violence of crime, rebellion, and war. He said, "We could work till doomsday to achieve peace and would get nowhere as long as we ignore passive violence in our world."

Note that wealth without work is number one on the list. Doug Noland has made a career or warning us about the addiction of speculative finance. In his latest, Flow of Funds, Noland gives us graphic evidence of our addiction, as well as a warning, once-again as to where we are headed:

Noland's conclusions:

...We are witnessing – both in the Fed’s "flow of funds" and with real world flows of finance - the consequences of many years of unrestrained asset and speculative-based Credit growth.

The current explosion of non-productive Credit Inflation literally required decades of (U.S. and global) Financial Sphere and Economic Sphere "evolution." It has been amazing to me that the economic community has generally disregarded the monumental changes that have transformed both finance and the nature of economic output. Instead of thoughtful and judicious analysis, carelessness conquered and repressed. It is a New Era, they preach to us. Credit growth doesn’t matter; Current Account Deficits don’t matter; mushrooming leveraged speculation and derivatives markets are healthy for the system; inflation has been pulverized and the Fed has complete and masterful control of both THE price level and the economy's growth rate.

… It has been more than a challenging exercise to explain in real-time the various corrosive aspects of Credit and Asset Inflation, as well as the highly deleterious effects of Credit Bubble "Blow-offs." It has been a struggle to comprehend and illuminate the characteristics of a Credit system where the demand for borrowings has minimal impact on the price of (unlimited) finance. My view of the great risks associated with asset markets and economies distorted by leveraged speculation-based liquidity has gained few adherents. Even subsequent to the spectacular technology boom and bust, the analysis that booming corporate profits and cash-flows are a Credit Bubble Phenomenon simply hasn’t resonated one iota. It has been virtually impossible for me to elucidate why ongoing enormous huge consumer sector debt growth and the disappearance of "savings" is problematic. Ditto the notion that Credit Bubble-induced wealth disparities and unjust wealth redistributions will eventually lead to myriad animosities and backlashes, including sentiments supportive of "protectionism" and antagonistic to free markets. I have never adequately made the case why it is so vital for our nation to be much more self-sufficient.

As easy as it seems that it should have been, I don’t feel I effectively countered the absolute nonsense that our Current Account Deficit is driven by unrelenting global "capital" inflows. And I have not even come close to shedding light on the reality that unchecked – and inevitably unwieldy and unstable - global finance has been a commanding force within what the New Paradigm crowd trumpets as virtuous free-market "globalization."

… I suspect that Credit Bubble-like analysis will garner more attention going forward … I believe the Fed and global central bankers may finally comprehend that they are facing a very serious problem – that Credit and speculative excesses begetting greater excess demand a true tightening of global financial conditions. Importantly, hope that a cooling housing market will obligingly chill the Bubbling U.S. economy is fading rapidly. As the "Flow of Funds" confirmed, the Credit system is currently firing on all cylinders and the Bubble economy has a full head of steam. The U.S. Current Account and Global Imbalances are poised to only worsen, fueled by Bubble dynamics that now command Credit systems and asset markets around the globe. Expectations for a slowing U.S. are shifting to fears of a runaway Global (Credit) Boom.

The U.S. Bubble economy has had years to adjust and adapt to a progressive rise in Credit growth and liquidity. I do not expect a bust to manifest first in the real economy. The Economic Sphere comfortably absorbed $3.3 Trillion of new Credit growth during 2005, and I see little reason why it couldn’t muster the same with, say, upwards of $4 Trillion this year. But boy is that Global Pool of Finance Ballooning - today exponentially. The resulting Asset Inflation, Bubbles and Imbalances were problematic last year, and they are destined to be much more so this year.

The Wildly Inflating Global Financial Sphere is the key issue today; it will likely remain the key issue until it cracks. Massive Credit inflation may flow effortlessly through contemporary real economies, but the residual is an Accumulating Elephantine Pool of Unwieldy Global Finance, much of it in the hands (directly and indirectly) of an aggressive international leveraged speculating community. With a notably more hawkish (collaborative) tone from the Fed, the ECB, and even the BOJ, global speculative finance has passed a key inflection point.

The more highflying and speculative markets around the world have suffered their first serious downdraft in some time. Perhaps, even a bit of fear has begun to supplant what has been copious greed. Have liquidity conditions begun to change – are we seeing meaningful de-leveraging - or will this prove more a case of a pause that refreshes over-liquefied speculative impulses? Will the powerful speculator community call the central bankers' bluff? I will not venture a guess as to whether we have been observing the initial "piercing" of The Global Speculative Finance Bubble. But I will continue to suggest that we have entered a much more volatile and uncertain market environment across virtually all asset classes, the Problematic Terminal Bubble Phase where underlying fragilities and vulnerabilities begin to emerge.

Consider more from Elaine Supkis recently on "Stupid War" Excess and Reckless Deficit-Spending Excess.

And from Paul Kasriel's recent Econtrarian on Housing Market Excesses [PDF] .

Comments

[bailey]

Dave, You are ONE GREAT read. thanks.

[Lord]

If you think about it, wealth without work is the rule, not the exception. People can't become wealthy by working for it, wages are never that high and the number of hours available is finite. It is only the creation of ideas and the advantages of investment that can produce sizeable wealth.

[Dave]

Creation of ideas is indeed a useful byproduct of useful incentive systems. Joan Robinson once said something like, "Capitalism is cruel and unjust, but it delivers the goods, and it is the goods you want."

As to the advantages of investment, they are indeed real. Kevin Kelly once said, as one of his nine laws of God: "Them that has, gets." And therein lies one problem: distribution! How do you keep capitalism from killing itself by rewarding "them that has"?

[Dirk van Dijk]

"how do you keep capitalism from killing itself by rewarding them that has?"
Well for starters you could have an estate tax, you could also tax dividends and capital gains at the same rate as ordinary income, and you could have a progressive tax system. You know what, if we did those things, we might even be able to balance the budget. Oh wait raisng taxes would cut revenues in the parallel universe inhabited by the GOP so we couldn't do that.