A normal economy employs capital, labor, and materials to produce goods (and services) for domestic consumption and exports. To the extent exports exceed imports, the economy runs a trade surplus and the nation builds wealth. The engine of such an economy is manufacturing. Banking (debt financing) and Wall Street (equity financing) play the supporting role of raising capital to make manufacturing possible. That’s the way it was for the U.S., up till the Reagan years in the 80s.
Reagan’s deindustrialization started massive offshoring of manufacturing and hollowed out the Rust Belt, starting with the steel and auto industries. At the same time, his financialization started a debt culture built an ever expanding credit “industry” and a financial “economy” increasingly decoupled from the physical, real economy. This financial “economy” is in every way a casino with ever more sophisticated betting mechanisms (derivatives), generating billions in paper gains/losses often without contributing a dime to the physical economy. It diverts capital from building wealth in the physical economy to creating debt (and inflating asset prices) in the financial “economy”, giving the illusion of economic growth. Most damagingly, through its ever more sophisticated and opaque market operations, it facilitates unbridled debt expansion:
This financial “economy”, controlled by a handful of mega banks, metastasizes like a cancer with exponential growth in debt. It systematically transfers wealth from the middle class (the 99%) to the elite (the 1%) when financial bubbles are first blown by the Federal Reserve Bank “printing” money out of thin air every time there is a financial crisis (ostensibly to “save” the country from slipping into recession), — only to be later burst by another financial crisis that inevitably results from the bubble. This practice is coined the “Fed Put”, starting with Greenspan when a number of financial crises followed Black Monday in 1987, most notably Long Term Capital Management, the Rubles Crisis and the Asian Crisis. the “Fed Put” continued with three subsequent Fed Chairs, — Bernanke, Yellen and Powell. This is the impact of the “Fed Put” (bubble blowing and bursting) on the elite 1%:
And this is the impact of the “Fed Put” (bubble blowing and bursting) on the middle class:
So how big is the cancer? Even the following official (usually deceptively rosy) 2021 GDP by industry figures paint an alarming picture:
With manufacturing at only 10% of GDP, we clearly don't make stuff (other than military gear) anymore. Government (which taxes and spends wealth created by the private sector) is bigger then the “producing” part of the private sector. The biggest part of our economy is “FIRE” (Finance, Insurance, and Real Estate), followed by servicing (euphemistically “flipping hamburgers for”) each other. What’s wrong with this picture? At that, the 21% official FIRE figure is grossly misleading. It merely measures the annual % contribution of the FIRE sector to overall GDP. It does not measure the actual size of the financial “economy”.
The “currency” of the financial “economy” is debt. Intuitively, debt at 30% of GDP (before Reagan) makes sense; debt at 130% of GDP (now) is alarming. But that's not the half of it. Total US GDP in 2023 is approximately $23 trillion. The value of all publicly listed companies in the U.S. per their stock prices totals $44 trillion — absurdly almost twice the GDP. The value of all derivatives (side bets in the casino, with no collateral) totals $18 trillion in 2022, — almost 80% of GDP. These figures should give you a rough idea how out-of-whack the size of the financial “economy” is, relative to the real, physical economy. Hidden from public consciousness is the highly disturbing fact that the tail is not only wagging the dog, but is bigger than the dog. And the tail is growing every passing year with new debt being issued.
Every currency in the modern world is fiat (pieces of paper based on trust in the issuing government) and debt-based (creation of currency is creation of debt). The current global debt is $400T and the world is already insolvent. The only way to pretend (solvency) and extend (the system) and is by printing ever more currencies (issuing more debt). This makes possible paying old debt with new debt, and to pay it with currencies increasingly worth less. Perpetual rise in price levels — despite natural price deflation from exponential productivity increase through technologies — is the inevitable result. A 10 cents cup of coffee in 1970 is now $3.50 and will surely be more ten years later. (But if coffee or anything else were to be priced in Bitcoin, we will see the price steadily go down with productivity gains in producing it.)
The segment of society hurt most by inflation is, of course, the poor. Some liken it to “stealth tax”. Others liken it to “theft” (the power that be, by manipulating the price and quantity of money, reduces the purchasing power of currency held by the mass). Current chaos in major cities (homelessness, drug problems, retail stores having to close up because of rampant looting, etc.) attests to that. These people want bigger government to administer bigger handouts to solve their problem. Bigger government is more deficit spending and more debt issuance, which only worsens the problem.
Dick Cheney, who worked for Reagan and later two generations of Bushes, famously said “Debt doesn’t matter”. He didn’t bother to explain that debt doesn’t matter only because foreign governments and enterprises park excess U.S. dollars (either from trade or capital flow) in U.S. Treasury bonds (government IOUs). Energy and other raw material exporters like OPEC, Russia, Brazil, etc. used to park their trade surpluses in U.S. Treasury bonds. So did exporters of finish goods like China and Japan. Now, under China’s leadership, the Global South is coalescing on a de-dollarization movement and will cease trading in U.S. dollars or investing in U.S. Treasury bonds. If foreigners stop subsidizing our unearned standard of living by lending to us, then our standard of living will go down.
The Federal Reserve will wind up being the sole buyer of ever larger Treasury issuance. This is like writing yourself checks from an account in which you are already overdrawn. To that end, Powell’s “double down” Fed Put may have already crossed the Rubicon. That is to say, defaulting on our national debt is fait accompli. It is just a matter of “how” we default (some forms of default are more “stealthy” than others).
