Leverage

Since it is Monday and not Friday as Atrios constantly insists I occasionally like to draw your attention to things economic.

This piece appeared over at New Economic Perspectives and while it’s slightly wonky at the beginning it gets more lucid toward the end and is overall a good explanation of the basics by a real, live jive, economist (which, as I periodically remind people, I am not. I am a trained Historian, Journalist, and Computer Programmer and Technician. I’m also a lapsed Water Safety and Lifesaving Instructor among other things that are not particularly relevant to this discussion).

Money and Banking Part 7
by Eric Tymoigne, New Economic Perspectives
Posted on March 6, 2016

The Financialization of the Economy

The financial industry is in the business of dealing with leverage. Its business is about incentivizing other to go into debt (that’s what most of its assets are: claims on others) and it itself uses a lot of leverage to boost the profitability of its business. Banks grant credit, pension funds rely on financial claims to pay pensions, etc. For every creditor there is a corresponding debtor and so for every financial asset there is a corresponding financial liability: financialization also means “debtization” of the economy.

The financialization of the economy means that the financial sector has become much more important to the daily operations of the economic system. The private nonfinancial sectors have become more dependent on the smooth functioning of the financial sector in order to maintain the liquidity and solvency of their balance sheet, and to improve and maintain their economic welfare. Households have become more reliant on financial assets to obtain an income (interest, dividends and capital gains) and have increased their use of debt to fund education, healthcare, housing, transportation, leisure, and, more broadly, to maintain and grow their standard of living.

Nonfinancial businesses also have recorded a very rapid increase in financial assets in their portfolio and a growth of debt. Some of them, like Ford or GE (until recently), have a financial branch that provides more cash and cash flow than their core nonfinancial activity (Figures 11, 12). The counterpart of these trends has been a growing share of outstanding financial assets held by private finance (Figure 9). From the late 1960s, the share of financial assets held directly by households dropped significantly from about 52 percent to 30 percent. Instead, a growing share of assets has been held by private financial institutions, which went from 25 percent in the late 1940s to 40 percent right before the crisis. The rest of the world recorded most of the rest of the gains from 2 percent to 10 percent of U.S. financial assets. The share of national income going to the financial industry has also grown quite significantly after WWII (Figure 10). A first wave occurred in the 1950s and a second one in the 1980s and 1990s. Today, about 18% of national income goes to the financial sector, something not seen since the 1920s.

What most people don’t get about Modern Monetary Theory and why it’s also called Chartalism is that very little of it is controversial thoughts on the origins and utility of money. Most of it is straightforward Generally Accepted Principles of Accounting. Now this may surprise you but most economists know very little about Accounting and as a discipline (in the sense that it’s anything but rattle-shaking VooDoo) most Economics is unfounded speculation about human behavior, misguided faith in Calvinist Predestination, and political prejudice and advocacy.

Reasoning from results or even bothering to compute them? That’s for suckers.