(Part three of a four-part series examining the monetary system.)
Another danger of having a money system controlled by private banking interests is something relatively new in our history: the financialization of the economy. Before the 1970s, capital was mostly used for economically fruitful purposes, such as production. Banks still had undue influence on society because of their license to create money and charge you interest for that right, but at least the money was loaned for more or less productive purposes. Since then, things have reversed. Most money today is directed to what economists call the “derivatives market”. Whereas traditional investing has revolved around advancing money for economically productive endeavours, the derivatives market is about betting on whether an economic endeavour will go up or down. Speculators can bet on anything from stocks, bonds, even currencies. Derivatives can also be bought and sold as a form of insurance to “hedge” one’s risky bets. In other words, most money is flowing toward a global casino that doesn’t care if the economy succeeds or fails. In fact, a privileged few can profit greatly when it fails. Whereas finance used to support industry and the real economy; it is now there to cannibalize it. As Ellen Brown, author of Web of Debt, explains: “Derivatives are basically just bets, which vacuum up value without producing anything.” According to Sprott Asset Management, a respected Toronto-based brokerage firm, the total nominal value of the global derivatives market is a mind-boggling $743 trillion. As Eric Sprott, the company’s CEO points out, that is equivalent “to more than 11 years of everything the world produces. It is far and away the largest asset market the world has ever known.” To make matters worse, the derivatives market places bets with a high proportion of borrowed money from banks (i.e. bank created money). Borrowing money for derivatives can be hugely profitable when riding a market bubble, but devastating when the legalized pyramid scheme comes tumbling down. It is worth noting that the massive Wall Street bailouts were largely devised to cover irresponsible bets made in the derivatives market. Noam Chomsky, the great American intellectual, recently said to me in an email: “The financializaton of the economy in the 1970s was a major event, in my judgment…more important in world affairs than the collapse of the USSR.” If this is true, then we are truly in the midst of historic times. As of now, the Obama administration has gone to great lengths to preserve the financial economy. His economic “reforms” announced in June were basically written by the banking industry and only served to illustrate that big banks have no interest in changing their financial games. Why would they? As it stands now, they profit greatly in “good times” and have the taxpayer to cover their losses in bad times. There is zero risk if you are a big bank these days. The same is unfortunately not true for the majority of people who reside in the real economy.