A Tale of Two Economies
It’s the best of times, it’s the worst of times. It’s a time of steady income, it’s a time of unemployment. It’s a time of financial joy, it’s a time of financial suffering. It’s a time of rescue, it’s a time of abandonment. Exactly how you’re experiencing this massively disconnected dichotomy, though, depends on whether or not you’re an investor.
Liberal or Conservative, Jew or gentile, introvert or extrovert — you either have a portfolio or you don’t.
Most of us primarily live and work in the “real economy”. In the world of finance and investments, that’s what it’s actually called: “The real economy”. What does that mean? Well, if every part of your life is spent in the real economy, you’re probably struggling right now. Many in the other economy — the financial economy — mostly are not.
If you work most days, live paycheck to paycheck, and have little to no money in a 401(k), you’re squarely in the real economy.
If you’re a trust fund baby who inherited a lot of wealth, never worked a day in your life, yet keep making money on interest and investments — congratulations: you’re near the top of the financial economy.
(Oh, and most of your friends are probably using you.)
Believe it or not, the US Government is in the real economy. The Federal Reserve, however, is wholly in the financial economy. In fact, it’s almost like the Fed is the government — over the banks, the market, and everything else in the world of finance.
When the banks need help, Big Daddy Fed comes to the rescue. A corporation in distress? Don’t worry, Big Daddy Fed is already on the way. If Vincent Vega were a corporation, and Jules was a bank, the Fed would be Winston Wolfe.
You know, because they shot Marvin in the face.
But Daddy Fed isn’t helping you. See, Uncle Sam needs to come to Daddy Fed and ask for a loan — and then Uncle Sam uses that money to help you. Sometimes.
Not enough lately.
Stock market tanking because people are freaking out over a virus or some shit? Don’t worry! Daddy Fed just needs to say the right words — and it will calm down. In fact, the market will calm down even before any help arrives — that’s how much the market trusts Daddy Fed. Daddy soothes the market, reminding them “Don’t worry, you’re not unemployed — they are” and “Don’t worry — I’ll make sure you get help first before anyone else. Uncle Sam has to wait his turn, and if he wants to help out his poor, out-of-work kids, he can do that with our money, because all his poor out-of-work kids will have to pay it back anyway.”
Every time we go to a bank, we’re feeding the financial economy. Your deposits become casino chips for them to play around with, and they place an “IOU” in your account. When you take out a loan, it allows the bank to create the full amount of money you’ve requested out of thin air — and if the result of using that loaned money doesn’t create value or production into our economy, we get more inflation instead.
Eighty percent of the money within the financial economy actually only serves its own interests. Just 20% goes toward any actual productive purposes for growth in the real economy. Big corporations have been increasingly self-serving as well; Many don’t grow by research & development, creating something new, or otherwise re-investing back into their business — but instead have focused continually on maximizing shareholder profits.
The stock buybacks for instance — if the airlines had held onto their cash for a rainy day, invested in some newer planes, or a bit more goddamn leg room, that would have actually helped ‘the real economy’. But they didn’t — they instead bought back their own stock to increase the value to their shareholders, boosting their stock price in the market. And Daddy Fed was pretty proud, saying “Son, you’re doing a great job keeping your money away from Uncle Sam’s kids. Here’s some more money.”
It’s a polarizing issue in America — specifically because of the stock market. Why? Because lots of people in the real economy have their little toe dipped into the market. If not with any stocks, possibly bonds, a mutual fund, or maybe a retirement account. Many people have no idea what they are actually investing in; which companies are in their funds, how their practices line up with their own beliefs or personal standards on what is acceptable. They don’t want to know. They just want dividends and growth.
Even if they’re a regular guy or gal, watch what you say: If they’ve made any money in the market, or they stand to lose some of that money if it goes tits up — they’ll turn on you in a second, and they’ll stick up for Big Daddy Fed.
Meanwhile, those who live almost fully in the financial economy laugh, saying “Because they’re just getting scraps from our table — they think they are like us! What a good move it was getting rid of all those pensions, and making them put food on our tables to save for their own retirement! So what, they get a few scraps sometimes.”
It’s like having a pet: they feed it, and it grows and grows. Then one day they realize they’ve been tending to a voracious, uncaring monster, and it eats them.
You thought you were doing okay; good job, good pay, you took care of the monster. Then your own company’s stock goes up because they laid you off. This is how the Middle-Class ends — not with a bang, but with maximized profits.
It’s gotten so bad that many of us today don’t even know what a pension is — they’re becoming extinct. There are 75% less pension plans now than there was in 1986. The retirement plans that have replaced them shift the risk to the employee — and free up lots of money that would be earmarked for pensions to instead be added to the bottom line on the company’s balance sheet.
Are we understanding yet, how the stock market can float along just fine despite all the troubles you see around you? All the unemployment with rumors of permanently lost jobs? All the evictions that already happened and will continue to happen for months? After that, the people who start losing their homes?
Don’t you see?
Unemployment means companies are saving money by not paying those people, and that helps the market.
Evictions mean higher rents will soon follow.
Losing their house means someone else will buy it cheaply as a second, third, or 100th house and rent it out for a nice profit.
Increasingly, our loss is their gain. Their gain is their gain. And their loss becomes our loss.
That’s precisely why the financial economy does not give one fuck. Our loss is literally their gain. There’s been so many types of investments that are now backed by our debt, they make even more money because we are in debt.
You may remember much of the fallout from the 2008–2009 housing crisis was because of something called “CDO’s” — Collateralized Debt Obligations. If you had a mortgage, it was likely grouped together with lots of other people’s mortgages, sliced up as they say, and sold as a security. Your house was the collateral for what often turned out to be an unsafe investment, and these CDO’s were the hottest thing around. They were being passed around like a game of hot potato (guess who was caught holding it?). The amount of leverage was unbelievable. The entire scheme was predicated on not having any major market disruption.
Among the people from the 2008 crisis that were foreclosed upon or had a short sale, 65% haven’t returned to home ownership — they’re now either renting, or living with others, or possibly homeless. There are, sadly, a troubling number of US households that already have a non-student, non-family member living with them today.
CDO’s are still being sold today, but more popular are the supposedly safer “CLO’s” — Collateralized Loan Obligations. I can already see the disbelief on your face. They’re yet another experiment on how to minimize (shift) risk away from the investors as much as possible — to the real economy.
Oh, and by the way, Wall Street is also doing this sort of thing with your student loans, your credit card debt, and even your car loan. Seriously. But don’t you worry! As long as there aren’t a ton of defaults on all these different kinds of loans — as long as everyone keeps making all of their monthly payments, everything will be just fine.
“The best part is, when things really go south, we make all the taxpayers pay for it!”
Are you a little sick to your stomach yet? Or are you a sociopath?
Those firms in the financial economy can’t wait for the Boomers to die, such a huge pile of money to get their hands on! Surely they’ve hired tons of bright-faced Millenial advisors telling you why you should give your inheritance to their firm to make even more money!
The financial industry is one industry of many in our country, just as there’s a manufacturing industry or a service industry. The difference is, when they go down, they pull us down with them.