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D. Afanasyev. Central banks and financialization: what shall we do next?

Author describes main consequences of the neoliberal economic approach which has led the world to the threat of the new global financial crisis.

Financialization as a process supported by the central banks’ monetary policy and its influence on world economy is also considered. Besides, conceptual difference between “economy” and “chrematistics” is mentioned.

Автор описывает основные последствия неолиберальной экономической модели, которая привела мировую экономику к новому глобальному финансовому кризису. В статье также рассматривается феномен «финансиализации» как процесс, поддерживаемый монетарной политикой центральных банков, и ее последствия для мирового хозяйства. Кроме того, предлагается концептуальное различие между понятиями «экономия» и «хрематистика».

Keywords: global crisis, financialization, central banks, monetary policy, social inequality, privilege

Ключевые слова: глобальный кризис, финансиализация, центральные банки, монетарная политика, общественное неравенство, привилегия

One financial analyst has written in his blog that the global financial system nowadays is in the eye of a global financial hurricane [1]. Economists failed to implement neoliberal economic theories in terms of economic growth stimulation. Pursuing the economic development is, to the moment, some kind of religion which requires the worship for any kind of growth, even the financial equivalent of aggressive cancer. Building financial and debt pyramids has led the world economy to accumulation of systematic risk when any random event is able to trigger financial collapse across the globe. We saw it in 2007 and we are most likely to see it in the nearest future.

It is needed to say a word about Brexit which occurred 23 June 2016. Positive voting results for the leaving the EU created real panic within international financial markets. The pound (-10% decline) plunged to its lowest level since 1985, S&P500 index was down 3.6%, European stocks dropped 8.6%, gold was up by ca. 8% as usual in terms of instability.  In this sense, Brexit, which is a major world event since the last 5 years, could become the beginning of the end for European Union, as well as for present world financial order.

Monetary stimulation and liquidity «helicopters» looked as a genial lifebuoy in order to save so called too-big-too-fail financial institutions. But the policy of the profits’ privatizations and debts’ nationalization initiated the activity of global carry trade mechanisms, multiple derivatives and historically biggest leverage. It is naturally the realization of moral hazard. The society gave one more chance to the bankers and they did the same thing.

Financialization could be determined as a process of financial pyramids creation in order to gain maximal profits and reduce possible risk under support of unlimited liquidity pools provided by the central banks. Although it is self-evident, we must note that emitents of reserve currencies exclusively take benefits from current financial hierarchy as it is connected with the balance of power after WWII. The fall of Bretton Woods system in 1971 removed the golden brake from dollar printing machine and initiated the dawn of financial markets including derivatives.

How can we describe then modern so called financial economy? It is more rational to call it financial chrematistics because the word “economy” translated from Hellenic means household management. Economy describes human relations in order to satisfy their daily needs. It is about agriculture, cattle breeding, handicraft, fishery etc. But financial bubbles have nothing to do with human needs; it is born by greed and parasitism. Financial sector moved away from the real sector. According to the classification of Aristotle, we are living currently inside the era of chrematistics which is the art of getting rich. From Aristotle’s point of view the accumulation of money itself is unnatural activity that dehumanizes those who practice it. There are two instruments of chrematistics – usury and speculative trade – as they are best suitable for making money. According to Aristotle, the «necessary» chrematistic economy is licit if the sale of goods is made directly between the producer and buyer at the right price when the deal does not generate a value-added product. By contrast, it is illicit if the producer purchases for resale to consumers for a higher price, generating added value.

To the 2013, the global derivatives market had the notional value of 1.2 quadrillion dollars [2]. That handily beats the entire world’s GDP of $71.8 trillion. It is hard to imagine this number. Just try to think that there are about 2 quadrillion stars in “El Gordo”, the largest cluster of galaxies we’ve observed so far. There is no need to say that an ordinary human being is unable to consume such amount of goods even in 100 lifetimes. So, we can also note that the whole concept of money itself nowadays is dead because it stopped fulfilling its main function: to be the medium of exchange. Initial idea was that money must represent an amount of goods in order to simplify the process of exchange between two persons that have so called mutual coincidences of wants. But presently it is not so, there is almost no connection between the cost, price or value of a good. Real estate and equity markets bubble across the world is a good example. Constant production of money without creation of real material value is exactly a financialization.

By and large, financialization cannot survive without modern policy of central banks that are responsible for the emission of reserve currencies. Exactly these institutes create the background for effective demand. But it is obvious that such policy has two inescapable consequences.

First means the inception of systematic risk inside every financial institution, which creates the domino effect treatment across global financial sector. So-called too-big-too-fails (or to-jail?) with their absolutely bureaucratized structure are real hotbeds for any kind of risk. That is why many experts, e.g. Minneapolis Fed chief Neel Kashkari, are talking about the segregation of such institutions [3].

Second consequence is about extraordinary wealth and income inequality which derives from the fact that those closest to central bank money and credit facilities are taking maximal benefits from each income-producing asset first at much lower costs than “unprivileged” groups of people. According to the Credit Suisse Wealth Databook 2015, top 0.7% of people own 45% of all global wealth [5]. So, the system is rigged to benefit the protected few and marginalize the unprotected many.

What should we do to improve the situation and to prevent international “skyfall” of financial markets, national economic systems and people’s life? I supposed that every thinking person, first of all, must clarify in his mind his place and role in this world and naturally true concept of what the economy really means and how it works in modern times. Thoughts determine actions. Greed and wish of power create non-equivalent economic relations, extraordinary wealth for privileged and poverty for periphery. It is easy as pie.

To sum up, financialization could be determined as unreasonable liquidity provision by central banks to international financial markets speculators who use that capital to intervene economic fields of developing countries and to grab significant part of the world product, financial instruments also are used by privileged minority to exploit the unprivileged majority.  Centralized hierarchies and the forces of financialization have extended the power of privilege globally so the few are benefiting at the expense of the many. Nowadays more and more people begin to understand their position in this world and economic relations in particular. The anger of “unprotected” (unprivileged) is rising. Status Quo failed, masses are starting to express their discontent in the streets, in social media and even in elections. Everything is in our hands. Time flies, but shall we find a peaceful solution and prevent inane and merciless revolt?

Bibliography

  1. Charles Hugh Smith Blog. Of Two Mids – URL: http://www.oftwominds.com/blog.html
  2. Here’s What $1.2 Quadrillion Looks Like. MoneyMorning – URL: http://moneymorning.com/2013/09/18/heres-what-1-2-quadrillion-looks-like/
  3. Fed’s Kashkari Seeks Solutions for ‘Too Big to Fail. Wall Street Journal. April 2016 – URL: http://www.wsj.com/articles/minneapolis-feds-kashkari-says-must-consider-options-for-ending-too-big-to-fail-1459783192
  4. The economic impact of Brexit. WoodFordFunds – URL: https://woodfordfunds.com/economic-impact-brexit-report/
  5. Credit Suisse Global Wealth Databook. Davies, Shorrocks, Ljuberas, 2015

Источник:  Вестник магистратуры : науч. журн./учредитель ООО «Коллоквиум». — 2016, №11-2. — Йошкар-Ола: Коллоквиум, 2016. — ISSN 2223-4047. С 158-160

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