The Dead-End Of Financialization: Innovation Is Slumping For A Reason

It’s a masterful stroke of near-genius, the kind in which you wish that amazing effort were actually used for “good” instead of continued decay. The American malaise is now a global malaise, and the fault runs from Bernanke’s “global glut of savings” to you and me. The orthodoxy has now begun preaching that the economy for all humanity is suddenly tapped out.

That excuses a lot of ills, missteps and falsification. QE didn’t fail, you see, it was a last, heroic Hail Mary to keep the barbarians of stagnation at bay, a long shot against some sudden and “mysterious” blowing contra-force. While the mainstream settles on where this “new normal” might gain access to the wider system, it is, for the thousandth time, conspicuous that no effort is promoted and spent on trying to figure out why this might be the case. Like the orthodox examination of the Great Depression, history is set once more to begin in October 1929.

The growing realization should not be that the economy has failed, it is rather that the Japanification is nearly complete (and that includes Japan for about the tenth time). Japan’s own mainstream version of economic and monetary history starts in 1990, so the orthodox ideal is preserved in both time and geography. However, there are a great many that see more than a fair bit of interest in examining the 1980’s and pealing back the layers of the Great “Moderation”; not the least of which is how such monetary “perfection” practiced globally can end with the complete ossification of every place that tried it.

I have contended, strongly and repeatedly, that monetary policy is not neutral as proclaimed, but rather that there are innumerable and immeasurable changes due to persistent monetary intrusions that depress economic potential (in the fullest sense of the word, not the narrow calculations of DSGE models). The fullest expression of that is the complete infiltration of “easy money” as an expectation – it erodes everything from what we expect from stocks (doubling your money every year is normal!) to actual work ethic (“put your money to work”) to resource allocation (day traders and house flippers, not to mention Wall Street mathematicians and lawyers, rather than industrial entrepreneurs). That is not neutrality.

This observation extends into the corporate realm, as businesses in the 21st century are addicted to stock repurchasing. The cumulative impact of all these efforts tending toward financial rather than the economic has to have had a negative bend on the long-term trajectory of the US (once the primary engine) and thus the rest of the global economy.

On Tuesday, Tim Aeppel wrote in the Wall Street Journal about the “slumping” pace of innovation. Now, there are obviously caveats that apply here, including what I referenced earlier about being immeasurable is literally true – there is no practical or closely definitive measure of innovation. So it is best to take a holistic approach and look at a broad cross-section of data and even anecdotes. But the conclusions largely line up with what I (and many others) have been saying for a long time: financialism impacts innovation, and the accumulation of that trend is lower growth without the mystery.

ABOOK Apr 2014 Innovation

The “magical” growth of the 1980’s and 1990’s was built on the wave of invention (and not just invention, but disruptive and revolutionary innovation) from the 1950’s and 1960’s. The internet boom was seeded and nurtured decades before; Greenspan just took credit, pun intended, for piling debt on top of it to “fill in the troughs without shaving off the peaks.” All the while he really was shaving off the peaks.

The timing of all of this could not be more obvious if it was faked. It is hard to see such a massive and random coincidence exactly when the pace of innovation, according to multiple sources now, starts to taper.  Again, from the Journal:

Mr. Vijg found inventions accumulated rapidly in the last century. But tellingly, the uptrend stopped and turned downward around 1970 and hasn’t recovered yet. “What we’re seeing is not technological decline—it’s deceleration,” he says.

Left unsaid in the Journal piece is why that might be the case. Some very smart observers have theorized that all the low hanging fruit, so to speak, has been harvested and the waves of industrialization just have run out of steam. That would be a natural explanation that places, perhaps unintentionally, a limitation on human ingenuity without giving a compelling reason for that limit. Is it more likely that there is a ceiling to the upsurge of human society, or that it has gone off track periodically? If the latter makes a more persuasive case, given especially timing and corroborative parallels, then the obvious chasm in money and finance that took place in 1971 is not random coincidence at all.

A financial economy of this nature, to be cute, consumes itself. The inattention to productive innovation in favor of resources dedicated to financialization is a real cost to future growth… When Sears sets out to become the largest financial services firm in history, only to be outdone by Gulf and Western and Ford, then economic orientation is seriously misdirected and misplaced. And it traces back to the idea that the PhD’s from Ivy League schools can readily replace a hard anchor to banking and money.

This is not the first time America experienced such financialism. Notice in the Journal’s chart that there is a dip that lasted through the 1910’s and into the 1920’s. While you could argue that was caused by various factors and deepened by WWI, it is at least interesting that it coincides with floating currencies and the first experience of the free hand for central banks away from gold.

As I said, none of this is dispositive by itself. However, the accumulation of these indications is more than enough to court serious examination of orthodox economics itself – not just the practice of it. Where has most revolutionary innovations in the past three decades taken place? For a clue, look at the changing list of Fortune 500 names, particularly at the top. What was once dominated by industrial firms and familiar, historic names is now practically a roster of primary dealers (that’s overstating it probably too much for dramatic effect, but not enough that it softens this point). From the corporate names on ballparks to the primary business of wealthy people in movies, it used to be industrialist and industrialists but is now hedge funds and banks. This was supposed to be an information economy, yet the margins of that information expansion seem to run disproportionately to finance.

Money is supposed to be only an economic aid, the very idea that underpins neutrality, yet now it is the point unto itself. We are left to pay the bill of what was proclaimed to be cost-free control. Those that practiced this witchcraft need to be made to account for all of it, not just the aftermath.

 

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