High Interest and High Rate of Return
Policies of Wall Street Transform the
Business and Labor Market
The Productive and Casino Economy
You might have noticed the terms productive economy and casino economy used on this site or in economic news articles. The productive economy and casino economy all use fictitious capital. Fictitious capital is created by credit system (fractional reserve banking once again).
The productive economy borrows money to finance purchases of raw materials and labor taking a short-term risk of being able to repay the loan. Repayment is made when the goods are sold. As long as the goods and services result in an increase in productivity and value the growth in the real economy matches the growth of the fictitious capital and the system can continue.
The problem begins when the financial industry starts running out of control, which always happens during periods of deregulation. Loans are made to businesses and non-commercial users at exorbitant interest rates (because the financial industry successfully lobbied to remove the restrictions on usury). Banks create new fictitious capital instruments to sell each other based on nothing but an index (like some derivatives).
The casino economy created by the financial industry places every larger bets in the hopes of ever larger returns. All these 'bets' (derivatives of all forms) are placed with highly leveraged money. The casino economy begins to dwarf the productive economy and takes control. The growth in the casino economy in the US has exploded to become more than 70% of the economic activity. The casino economy is also prevalent in other countries maybe not to the extent that is in the US. The casino economy created an enormous debt bubble.
Debt Bubbles and Positive Feedback
The only way to keep the debt bubble from bursting is to constantly inflate it with more debt. (This is an unfortunate consequence of relying on a fractional reserve banking system to create new money.) As every engineer knows this is what is called a positive feedback system. Positive feedback systems are inherently unstable. The time always comes when the bubble has to burst and the fictitious capital industry has to collapse wiping out the fictitious capital along with it.
Pre-Collapse Consequences for Society
Before the collapse (Kondratieff winter) there is an often-overlooked consequence that society is burdened with. That consequence is the 'magic hand' that steers society into occupations that have very high rates of return (read high pay) to try to keep up with the increasing debt. This burden of debt has been growing larger since the 1970's. This massive growth in fictitious capital was not restricted to the US. It was also being created in Europe, the UK, Asia and some South American countries.
Transformations of Business and Labor
Some people are fortunate enough to be in a position of power to demand higher salaries and benefits. The most obvious example is the ballooning of CEO pay packages, the enormous bonuses paid to quantitative analysts and, the ridiculous management fees paid to hedge fund managers. It also drives some of these same people to demand or implement a policy of gutting companies of low rate of return operations such as manufacturing. Transforming companies into buyers of sweat shop goods that are increasingly being sold on credit. Pushing many of the previously high wage-earning employees into the unemployment line or into lower paid jobs in the new so called service industry.
Banks and the financial industry have a solution for unemployment and lower and stagnant wages as well, more credit. People are forced to either abandon their homes and lifestyles while waiting for the 'miracle' high wage service economy to come to their neighborhood. The vast majority of the workers so not have the power of unique skill sets (or family connections) to demand higher wages, outrageous stock option bonus packages or golden parachutes.
Large debt burdens drives those without the power to make demands for higher wages look for new high rate of return professions, drug manufacture and dealing, prostitution, pornography, loan sharking, gambling, stock day trading, televangelism, quantitative analysts, debt collectors, and organized crime to name a few. (In the spirit of full disclosure, from this list this author is of the opinion that prostitution and pornography are both useful occupations for society and not as morally questionable as some of the others in this list. For all the faux feminists an empowered woman is one who is earning $300 an hour not one earning minimal wage while being verbally abused by a yuppie quant.) If prostitution were to be legalized or decriminalized throughout the country the rate of return on hourly labor would probably not be as high as it is currently. This large burden of debt on society steers people away from more mundane occupations such as, farming, tool and die making, manufacturing and, engineering to name just a few.
The occupational shift if left unchecked for a long enough period of time leaves a country highly vulnerable to social collapse and unrest as the skills to produce enough of it's own food and necessities are lost.