Sunday, January 20, 2019

Fundamental Fallacies Within Capitalism

                                                                                                written 13 January 2019
                                                                                                published 19 January 2019

            Trading goods and services, essential to a healthy civilization, eventually evolved currency, which allowed increased precision by fiscal quantification.  But money is a concept of confidence, with no inherent reality, thus equating money and real value is a mistake.  Some values are easily quantified, such as the number of sheep in a field, but essential values such as peace of mind, clean air, water or food, are difficult to quantify. The black-market value of a healthy human heart is $120K, but would you willingly trade your heart for the cash?  How about your child's?  The relationship between monetary value and personal or societal values is at best an approximation.  Our cultural preoccupation with fiscal value is destroying vital social values.
            Capitalist theory assumes a price includes all costs, allowing honest comparison in the marketplace, but such faith is naive in the real world.  Many costs are ignored because they are difficult to quantify, some are simply overlooked by the accountant, and others are deliberately excluded in order to transfer costs onto others.  These are called "externalized costs", a sanitary way of saying the price is a fraud.  Not accounting some of the real costs of an item allows for price reductions, which distort the "free market" to shift market share.  The pollution from destructive externalized costs is degrading the environmental and social commons through climate change, homelessness, and the obesity and opioid epidemics, to mention a few.
            After WWII, the Bretton-Wood agreement defining one dollar as being worth a specific quantity of gold, and fixed the exchange rate of other currencies to the dollar.  This ushered in a period of unprecedented global economic stability and real social growth.  In the early 70's, when the American economic empire peaked, the value of the dollar was allowed to float, and fiscal value became uncoupled from real value.  The last half century experienced a series of speculative financial booms, with limited increase in social value, each followed by a spectacular economic failure, which destroyed real value across the planet. 
            Fiscal growth is part of the "free market" dogma, but when monetary growth is decoupled from the real economy, money becomes worth less over time. An ounce gold cost $38 in 1972, and $1285 today, despite gold having the same economic functions.  The quest for ever greater "return on investment", independent of increased real value, accelerates the degradation of the monetary value because riskier investments promise a larger rate of return.  Unfortunately, the promise is fiction, being divorced from reality, and the economy eventually crashes. 
            In the early 2000's, the housing market heated with a speculative fever and mortgages were packaged into securities bought by global investors looking for good returns.  The demand was greater than the quantity of solid mortgages, so mortgage standards were lowered.  By 2007, hundreds of thousands of borrowers with no declared income and no down payment, had been loaned large mortgages with low introductory interest rates. These were sold to large banks, bundled into securities rated as "AAA investment grade" by commercial ratings agencies, and sold all over the world.   
            Regulators and business leaders, devout followers of the "free market" cult, quashed attempts to regulate the industry, believing that the market would not allow bad investments to be created or sold, and trusted the rating process accurately defined and isolated real risk.  The mortgage originators, knowing there would be defaults, sometimes even before the first payment, believed that once the mortgage was off their books, it was not their problem.  The companies packaging and marketing these securities devised elaborate risk management schemes to protect themselves, which ignored systemic low probability, high loss scenarios.  Participants made millions of dollars at each stage, by selling trillions of dollars of this debt around the planet.  Federal interest rates eventually rose, the mortgage interest rates reset higher, the housing market cooled, and the entire Ponzi scheme collapsed in a matter of months.
            But fines were small, and nobody went to jail, so no lessons were learned and the cycle is set to continue.  Repeating the same thing and expecting a different outcome is insanity.