What? Financialization?
Yes, apparently there is such a word, although I have been unable to trace it to any dictionary in my possession. Wikipedia, where I came across this literary monstrocity, defines it thus:
A term that describes an economic system or process that attempts to reduce all value that is exchanged (whether a tangible, intangible, future or present promises to pay) into a financial instrument, or a derivative of a financial instrument.
The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus to facilitate trade of such products or services among people.
Modern banking originated during the Middle Ages with merchants linked to the production and trade of grains on the Italian Lombard plains, a place name that has remained associated with banking to this day. The farmer could raise money to cover expenditures against a promise to deliver his crop at harvest time to a merchant banker against an agreed price. This was a risky business, calling for a high nominal interest on the monies thus lent. Since both the Catholic Church and Islam condemned usury, the business became dominated by Jews, who were under no such religious constraint. In time, merchant banking activities expanded to include both insurance against crop failure, as well as guarantee of future delivery to distant markets at a predetermined price.
The more successful of the merchant banking families became exceedingly wealthy, and went looking for profitable applications of surplus capital beyond their traditional metier, such as lending to kings, princes and their likes.
The main form of government deficit financing in those times was to cover war expenditures. These were not always repayable, and consequently bankrupt kings would in turn bankrupt their Jewish creditors by declining to honor their debt and banning them from their kingdom. End of problem.
Those were simpler times, if not necessarily happier ones. Now the the world, and particularly the developed western portion of it, is staring into an abyss of financial turmoil and accompanying economic hardships of unknown proportions and consequences.
Financialization - in other words, creation of money - was once a pretty straight forward concept. That is no longer so.
Traditionally, the most relevant and closely watched monetary index was that of M3, the widest aggregate definition of money in circulation. There used to be a fairly close correlation between M3 and the state and likely course of the economy. This correlation seemed to be slipping during the 1990s, and particularly so after the repeal of the Glass-Steagall Act of 1933 and the consequent deregulation of the financial markets in function of the Financial Services Modernization Act of 1999.
As a result of this apparent decoupling of M3-to-GDP relationship, the Federal Reserve decided in March 2006 to cease compiling and publishing M3 data. The justification was that M3 no longer told us anything about the economy that we could not just as easily surmise from M2 data. The additional work and expense involved in compiling M3 data was therefore no longer thought to be justified.
Here I have to ask myself: could the real reason be that the Federal Reserve had simply lost control of aggregate money supply as a consequence of financial deregulation and the creativity of the financial industry in coming up with ever more exotic financial instruments, many of which are traded privately, off balance sheet and out of sight, involving staggering amounts of money?
Here is one reason why I am asking: In 1970, world M3 was estimated at $2 trillion, at a time when world GDP was $3.7 trillion in nominal 1970 dollars. This gives a M3-to-GDP ratio of 54%. In 2008, world M3 was estimated at $62 trillion and nominal world GDP $59 trillion, a M3-to-GDP ratio of 105%.
Historical data indicate that the 1970 M3-to-GDP ratio was a fairly representative one for the world economic conditions at the time. If a a 54% ratio kept the world economy ticking over at a pretty healthy clip in the 1960s and 1970s, why should not a M3 of $32 trillion do the job in 2008? Where have those extra $30 trillion come from? Are they indeed real money, or just smoke and mirrors?
Since we are talking of values equivalent to half the entire world GDP, this is not pocket change.
The doubling of "money" during the last 40 years also finds a parallel in the United States, where financial industry profits went from 4 percent of GDP in 1970 to 8 percent on the eve of the 2008 financial crash.
So, let us return to the Wikipedia definition: "The original intent of financialization is to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus to facilitate trade of such products or services among people".
I can by this only conclude that there must be a lot of "money" in circulation these days that do not facilitate trade among people, but is just sloshing around the financial industry, to no common benefit but that of the financiers and their shareholders. That is, at least until the day when the smoke blows away and the mirrors break, and when the common taxpayer is called to the ramparts to save the day, once again.
If you are scared of what could happen, you are probably not scared enough.
