Money Under the Mattress

document.write(" serif">Why are interest rates so low? Why is spending so low? Why is our infrastructure crumbling? And why, with all this, is there no inflation? In Monday's column, The Diabetic Economy, Paul Krugman tells us about the idea that low rates are like insulin for a diabetic, necessary to manage the symptoms of a chronic disease. That got me thinking about what this chronic disease might look like.

It's true that our infrastructure is crumbling. Both Paul Krugman and Bernie Sanders have been saying we need to spend more. Interest rates are low, which should mean that spending on infrastructure is possible, even desirable. But government (read Congress) doesn't want to spend, because that would mean higher tax rates. And everybody knows that you can't borrow: you have to balance the budget. So what about the little guy? Maybe he could borrow, and get our economy moving again. But how does the little guy borrow? On his credit card, at 21% interest. He borrows only when he is in denial.

If the government is broke, and the little guy is broke, where is all the money? And what is investment? Who is investing? And in what?

We have come to look at investment from the side of the investor, without asking what the invested money does. We ask only how safe is this? and what is the return? Banks used to offer savings accounts which returned interest. Then the banks in turn would make loans to entrepreneurs who wanted to make something happen in the real economy. But as anyone with a bank account knows, that is not how it works today. So what happened?

Enterprises got larger. They issued stock: part ownership of the enterprise. The stock market provided a way to trade stock. It was a means of exchange. But in the last fifty years the financial world has changed. Finance has become “the financial industry”, a purposefully confusing rag-tag of banks, investment banks, venture capital and private equity companies, hedge funds, and insurance companies which issue contracts on wagers.

The underlying motive is of course to make money, but for whom? How is the money made? And what is produced?

The answer is that nothing is produced. The money is made by privatizing the profit and socializing the risk. In other words, by skillfully separating risk from profit. (Fraudulently, in my opinion. See or read The Big Short, the movie made from the novel by Michael Lewis.). And who makes the profit? An ever-smaller cadre of top managers. Fiduciary duty appears to be a thing of the past.

The result is that money is siphoned out of the real economy, the economy that makes the wheels go around. It is siphoned into private coffers, whence it seeks to find “investment” that makes a return for itself. Then that return goes right back into the coffers, without changing a thing in the real world. Is it surprising that this hoard money is having trouble finding a real home?

Through history, what has happened to that other means of exchange – money – when the people doing the trading lose confidence?

Weimar Germany. Inflation. Money loses its value. When people lose confidence in a shared convention, it doesn't work anymore.

We are witnessing a similar phenomenon in the financial world. The “smart people” are manipulating money to produce money for themselves, leaving the real world starving for investment. In this they have been spectacularly successful. (See Bernie Sanders for details.) But the world – the real world – is losing confidence in finance. The vast hordes of cash held by the top 0.1% of individuals (and companies!) have nowhere to go. Chinese money is bidding up real estate in California and Vancouver. North American money is fleeing North America for the tax shelters of the world, or begging countries with stable currencies to take their money at minus 0.8%.

What now? We have to look with fresh eyes at what investment means. Sure, it is return on money we park somewhere. But the real meaning is in what the money does when it is parked. Does it produce something? Does it change our future? Look no further than Elon Musk. He used his stake in PayPal to start Tesla. He hasn't shut down Tesla yet because he wants to make half the cars in America electric by 2020. He used his stake in Tesla to start SpaceX. SpaceX is taking over the work of the Space Shuttle. SpaceX just landed a booster on a barge. And SpaceX is going to colonize Mars. Purpose. Humanity is moving ahead.

Bottom line: money under the mattress serves no one. It is if it didn't exist.