monitoring the abyss

As we have noted, achieving a "return" on fake capital requires finding routes to achieving productivity at below the socially perceived value of money and then pocketing the difference.

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Before the flood of money becomes too excessive, sometimes the buyer can achieve actual production increases by bringing new efficiencies to a poorly run business that is well-placed in the market. This can spur competition to make similar changes in order to remain competitive.

The transaction is, however, a slippery slope. The successful investor begins to over-estimate his ability to achieve market efficiencies, believing that with access to more capital, similar advances can occur in ANY business that he buys. His earnings potential is therefore limited only by the amount of capital he can get his hands on.

Unfortunately, not every business is inefficient. Also, at the same time, earlier gains create a re-adjustment of the socially perceived value of money -- now factoring in the new efficiencies -- making it more difficult to meet similar performance goals. Also, success breeds "copycat" investors.

Additionally, the influx of capital is effectively a "subsidy" to the target business. In the long term, the money must be repaid with interest. In the short term, the new capital effectively subsidizes the product line. This harms competitors, because it is impossible for an unsubsidized product to compete against a subsidized one.

So, at this point we start losing overall productive capacity, as the non-subsidized competitors are driven out of business.

Further, when the ability to squeeze new productivity out of acquired businesses fails, then loan repayment must be achieved by other means. This will result in reduction of service, unethical or illegal practices, reduction of Research and Development, deferred maintenance, sale of assets, reduction of operating capital and other efforts that all have the net impact of REDUCING overall productivity for the company and society in general. In this way, the "worser" fish keeps snapping up the better run, more ethical "smaller" fish.

As we have noted, hording of commodities (as an alternative "safe" form of investment) also reduces productivity by driving up the cost of raw materials.

So, on the one hand the flood of "fake money" creates a dis-balance, itself driving down the value of money relative to actual productivity. And on the other hand, the investment practices to which that money is put to use actually drive down overall productivity in the society. This is exactly the opposite of the impact of money when it is first brought into the marketplace -- when it has the effect of increasing productivity by stimulating productive activity.

This suggests that flooding the market with money equaling or exceeding the GDP can only have the net impact of making the national and world economies LESS productive, with resulting harm to most or all of the 6 to 7 billion inhabitants.

If we wish to look at examples, how many businesses are still controlled by individuals who learned their trade in the industry, as opposed to "financiers" with no knowledge of the trade at all? Eg., Chrysler (Cerberus Capital), WAMU (TPG Capital), Coldwell-Banker/C-21 (Apollo Management), Linens & Things (Apollo Management), Regal Cinemas (Hicks, Muse Tate & Furst and KKR). Some companies themselves morphed into financial companies, even though they continued to bear the same label. Another example is Los Angeles Times, which went from Chandler family ownership, to various investors, to Tribune Corp. -- and now, no longer resembling the earlier product, stumbling on its last legs.

Unfortunately, the world economy is run by two generations of people who learned their trade(s) in a different paradigm -- one in which additional capital could be used to stimulate productivity rather than to kill it. We look to the "most successful" for leadership; and "the most successful" are inevitably those who made fortunes purveying the trade of financial buccaneer. These are precisely the people who should not be at the helm of the Titanic.

No improvement can occur until those making the decisions understand the present paradigm and not the one that fueled the post-WWII expansion. On the present trajectory, that may well require a generational change -- and a generation. A new group of leaders must emerge where "the most successful" are those who succeed not in the failed financial world but under the new paradigm.

If that is true, then the economy cannot be expected to truly recover for approximately 20 years while a new generation learns (through on-the-job training) how to cope with the new paradigm.

Whereupon, the cycle will begin anew.