Closed-circuit economies

Money is being drained away from an ordinary economy into an economic stratosphere with a logic of value all its own.

In an extended essay on financialization (first delivered as the keynote address at the Fifteenth National Conference on Economics of the Brazilian Political Economy Society (SEP)), John Bellamy Foster responds to Keynes and observes how increasingly segregated circuits of consumption and production affect the economy:

In the 1970s total outstanding debt in the United States was about one and one-half the size of GDP. By 2005 it was almost three and a half times GDP and not far from the $44 trillion world GDP. Speculative finance increasingly took on a life of its own. Although in the prior history of the system financial bubbles had come at the end of a cyclical boom, and were short-term events, financialization now seemed, paradoxically, to feed not on prosperity but on stagnation, and to be long lasting. Crucial in keeping this process going were . . . central banks . . . assigned the role of “lenders of last resort,” with the task of bolstering and ultimately bailing out the major financial institutions whenever necessary (based on the “too big to fail” principle). . . .

[As] Jan Toporowski (professor of economics at the University of London) observed in The End of Finance, '[We] have seen the emergence of an era of finance that is the greatest since the 1890s and 1900s. . . . In an era of finance, finance mostly finances finance.' . . . We can picture this dialectic of production and finance, following Hyman Minsky, in terms of the existence of two different pricing structures in the modern economy: (1) the pricing of current real output, and (2) the pricing of financial (and real estate) assets. More and more, the speculative asset-pricing structure, related to the inflation (or deflation) of paper titles to wealth, has come to hold sway over the “real” pricing structure associated with output (GDP). Hence, money capital that could be used . . . within the economic base is frequently diverted into . . . speculation in asset prices.

To put it more concretely: if a very wealthy person wants to maintain his spending power today, he may be far more interested in buying gold, collectible handbags, or commodities futures, than investing in a green energy company or even, say, Ikeas in China. A cautious investment manager following the herd may want, above all else, to deal with a counterparty who is "too big to fail," guaranteed by the coercive power of the state and backing of the Fed or Treasury to deliver whatever payments it commits to. Such counterparties are most often found on Wall Street. As Robert Kuttner of The American Prospect reports, "Fitch Ratings gives Bank of America and Citigroup 'stand alone' ratings of C/D when external government support is not included but actual ratings of A-plus when it is."

via balkin.blogspot.com