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Author Topic: Financial Pollution  (Read 642 times)
BobK71
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April 09, 2015, 03:35:57 AM
 #1

Financial pollution means that the total value of financial assets ("claims to wealth") exceeds that of goods and services ("real wealth") at current prices.  Once financial pollution becomes serious and publicly exposed, there are no good options, for policy makers or the average individual.

Financial pollution occurs when the political and financial elites issue assets (typically money and debt) that are more or less backed by the power of the state, mainly to benefit themselves.  Why does pollution always go up?  State backing lures investors to buy into the assets (at least initially,) while the incentives for the elites are to maximize asset issuance while there is any stability left.  You can always find an excuse to turn a blind eye to financial fragility.

What to do when the bust comes?  The standard options are (1) default/deflation, (2) devaluation/inflation, (3) financial repression, (4) exporting pollution to and importing stability from poorer/weaker countries, and (5) real economic growth to give the assets something to buy.  Typically, some combination of these will apply.

The last "option" depends heavily on luck.  Sometimes, there just aren't enough innovations or room for growth.  Even when growth does bail out pollution, it tends to encourage the society to feel freer to pollute in the next cycle.  So, we're forced to focus on the unpleasant options.

Exporting pollution is only possible for the richest and most powerful countries, and even then carries the risk of war and terrorism coming home to roost.  (E.g. the rise of Hitler was due to the West exporting the worst of the Great Depression to a prostrate Germany, via capital flows before and after.)

Default and deflation are the most painful and socially disruptive consequences, and are usually allowed only when the pollution is very serious.  Financial assets plummet, and people lose jobs and savings.  In post-1900 US, this really only happened during the Great Depression when banks were allowed to fail, and to a limited extent during the last mortgage crisis when Lehman Bros. was abandoned.

Devaluation and inflation are, globally, the preferred choice, as the easy way out.  Pain is spread around, and this, more or less, amounts to a cancellation of debt, and a fresh start with renewed stability.  But this has long-term moral hazard as it transfers wealth from creditors to debtors, and even more importantly, countries at the core of the world system (e.g. the US and EU today, and the UK during the 19th century) can't do this too obviously, since they derive a good part of their wealth and power by being perceived as less financially polluted and friendlier to creditors and financial morality than all other countries.

(This is perhaps the most difficult concepts to grasp: the core drivers and biggest beneficiaries of world financial pollution have the best reputation for cleanliness.   A good way to envision this might be drug dealing.  If the US is the biggest drug lord on the street, and world markets and opinion are the police, the top dog doesn't deal much directly on the street.  Most of its business is wholesaling to the lesser dealers, the elites in other countries.  When things get really bad and police crack down, it's usually those direct dealers who get caught.  And they now have to turn to the top dog for help, paying him handsomely for the privilege.  In fact, the top dog might even secretly tip off the police to move things along, both to extract more wealth from the other dealers, and more importantly to keep the overall activity from getting totally killed by going too far.  E.g. it was probably the US and Wall Street who pricked the Greek public debt bubble.  In the long run, though, the top dog also suffers the most inevitable decline.)

Financial repression in obvious forms is also avoided, if at all possible, by the core countries, as part of their persona and source of wealth is their avowed dedication to the ideals of economic liberalism.  But they will use it when they have to, or when they can afford to.  Thus, throughout much of the 20th century, in the US, ownership of gold was banned, and for decades there was a cap on deposit interest, an effective public subsidy of banks for fear that they might compete too hard for deposits and jeopardize their stability.

I like the term "pollution" because the beginning of state-backed issuance of paper assets is not problematic in a vibrant economic river of clean water.  But once the factory is built, pollution always grows via perverse incentives, and the public is not aware (or made unaware) of it until it's too obvious and too late.  Also, pollution tends to take from the many to give to the few.

You won't find "financial pollution" or the concept, as such, in economics textbooks.  This seems to make the term "pollution" even more appropriate, as the rot touches more than the financial and economic spheres of life.  The more financially polluted a society, the less it can afford intellectual honesty.
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April 09, 2015, 12:21:10 PM
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There are different ways to look at it. For me, I would define financial pollution that equates to a system being heavily corrupted by bankers, policy makers, regulators, politicians who manipulate the system for their own gain.

BobK71
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April 09, 2015, 01:06:17 PM
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There are different ways to look at it. For me, I would define financial pollution that equates to a system being heavily corrupted by bankers, policy makers, regulators, politicians who manipulate the system for their own gain.

Yes, the corruption you mention is absolutely true.

The precise method of appropriating wealth from the rest of society is a partnership between the political and financial elites.  The politicians and banks both issue paper financial assets while there is trust in them, mainly to gain "free" power and wealth personally, and the toxic effects of this issuance, in the form of long-term inflation and financial instability, is left for the economy at large to deal with.

In this partnership, the state provides the power, while bankers provide ideas.  The financial assets issued by banks are built on top of those issued by the state (money and public debt), so the bank assets form a layer of protection for the state assets (when bank assets crash, state assets actually go up in value in most cases -- the state can also choose to bail out or abandon the banks.)  This is the benefit the banks give to the political class in return for a share of the loot, in the form of some degree of public guarantee of their debt, lax regulation, etc.

The central bank is the corner stone of this system.  Its function is to keep both sides "honest" under the terms of the partnership.  If the state goes wild with issuing public debt, for example, the central bank can refuse to print money to bail it out.  If a bank similarly acts out, the central bank can regulate it or refuse credit.

The key, though, is issuing financial assets and artificially propping them up with state power.
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April 09, 2015, 07:40:28 PM
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FYI, Bitcoin is also "financial pollution" because it also is not backed by anything.

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BobK71
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April 09, 2015, 08:45:56 PM
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FYI, Bitcoin is also "financial pollution" because it also is not backed by anything.

You don't think I would add bitcoin to the polluter list if I wanted to survive in this forum, do you?  Cheesy

Financial pollution (by my definition) and bad things happen if and only if the state interferes in the market value of a financial asset.  Specifically, it means the state props up the value of the asset because it (and its finance friends) can receive basically free wealth and power from freely issuing it.

Please note that, under this definition, gold-standard-backed currencies, say of the 19th century, *were* a cause of financial pollution.  The whole reason for gold backing was to suppress the price of gold and at the same time prop up the value of currency (to an officially fixed amount of gold.)  No wonder, all gold standards collapsed, as financial pollution just kept growing.  (On the eve of World War I Britain held only 3% of the gold necessary to redeem its total issue of paper, at the official rate.)

Of course, financial pollution grows even faster with fiat currencies.
AtheistAKASaneBrain
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April 09, 2015, 10:58:30 PM
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For me the alternative currency subforum on this board is the definition of financial pollution: scammers and shitty products on a daily basis polluting the cryptocurrency term. Thank god the trend is dying now and it seems we'll get to see what the actually quality ones survive.
BobK71
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April 10, 2015, 02:11:06 PM
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For me the alternative currency subforum on this board is the definition of financial pollution: scammers and shitty products on a daily basis polluting the cryptocurrency term. Thank god the trend is dying now and it seems we'll get to see what the actually quality ones survive.

People can choose to believe any snake oil salesmen or not.  These things will live or die in the market, as they should.  The problem really comes when the state, using the power we all invest in it, becomes the biggest snake oil salesman.

Then everyone will face a dilemma with their savings: if you don't buy into it, the government has a lot of power and the propped-up asset value might outlast your lifetime, even if it has to crash eventually.  If you do buy into it, you know the whole system is unstable at the core, and can crash any time.
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