As the value circulation mechanism of society, finance is analogous to the body’s circulation system. Much as the executive and regulatory system, government, is analogous to its central nervous system.
There was a time when government was private, but when these monarchs finally and totally lost sight of the fact they served a function to society, in order to be served by it, they were largely usurped. Finance is having its own ‘Let them eat cake’ moment.
At the core of the problem is that money mostly functions as a contract, with one side an asset and the other a debt, but we still think of it as a commodity.
It can be a commodity, such as with physical gold, or bitcoin, in which the value is integral to the entity, rather than an obligation from some other party, though as we experience it as quantified hope and security, so we try saving and storing it, like a commodity.
Even Econ 101 describes it as medium of exchange, store of value and price setting mechanism, though the last is an attribute of being a medium.
Yet a medium is a dynamic, while a store is static. For example, blood is a medium, while fat is a store, or roads are a medium, while parking lots are a store. Fortunately economists don’t practice medicine, or design highways. They only design the systems by which the economic foundation of society is supposed to function.
Since it functions as a contract, in order to create the asset, similar amounts of debt have to be created. For one thing, this creates a centripetal effect, as positive feedback draws the asset to the center of the community, while negative feedback pushes the debt to the edges. Not to mention encouraging the creation of ultimately unsupportable debt.
While this is a natural dynamic, finance is still circulation for the entire community, so it would be like the heart telling the hands and feet they don’t need so much blood and should work harder for what they do get. The effect would be like clogged arteries and the solution, quantitive easing, is like high blood pressure to compensate.
The other elephant in the room is that government has been induced to be debtor of last resort. Where would those trillions go otherwise? Derivatives? Junk bonds? Given how much gets thrown in the burn pit of military spending, basically we are blowing up other countries to preserve the value of surplus wealth.
Public debt is used to back private wealth. This can be traced back to the New Deal, as that is when the Federal deficit started to grow. Not only was Roosevelt putting unemployed labor back to work, but unemployed capital, as well.
While Volcker is credited with curing stagflation, it should be noted that while the higher interest rates used may have reduced the growth of the money supply, they did so by restricting it to those willing to borrow and presumably grow the economy, thus actually reducing the need for money. The inflation didn’t start to come under control until about ’82, by which time, Reaganomics had pushed the debt to over 200 billion yearly, for the first time ever.
Consider one of the primary methods for the Federal Reserve to raise interest rates is to sell government debt it bought to issue the money in the first place and retire that money. So the effect of the Treasury simply issuing a lot more debt would have a similar effect, but instead of retiring the money, it gets spent in ways which support the private sector, but not actually compete with it for viable investment opportunities, such as warfare and welfare.
Not that welfare is bad, but it is a bandaid, not a solution. When Reagan tried to gut welfare in ’86, one of the primary lobbyists against it was Archer Daniels Midland, the ag conglomerate. As the money eventually ended up in their pockets.
The fact is that as a medium, the functionality of money is in its fungibility. So we own it like we own the section of road we are using, or the fluids passing through our bodies. Hoarding either would be senseless and in the big picture, the same applies to money.
There are reasons that old Fed chairman said that he was the one to take the punch bowl away, when the party got going. Now, they just add another bottle of vodka, when it runs low.
Just suppose, entirely hypothetically, the government were to threaten to tax out what they currently borrow? After all the hyperventilating, people would start finding other ways to store value.
Given we all mostly save for many of the same reasons, from raising children and housing, to healthcare and retirement, if these could be directly invested in as community assets, rather than everyone trying to save for them individually and creating this metastatic financial system, then we would have the stronger communities and healthier environments, that would give us the safety and security for which we presumably save money.
The irony of our individualistic ethos is the resulting atomistic culture is more easily controlled by institutional authority and mediated by a parasitic financial system. Networks matter as much as the nodes within them.
Not that finance can be a direct arm of government, as politicians live and die on the hope they inspire, so printing extra money has long been a cheap high.
Like the head and the heart, government and finance serve different functions and are often in conflict, as they represent judgement and desire, so how this will eventually work out will take considerable time and effort to figure out.
