In the course of recent economic history, (at least in the last millennium) the role of finance has been, primarily, to intermediate transactions between various market operators. In addition, finance was also prominent in all interactions between market and non-market entities (mostly the states.) Consequently, sophisticated finance ended up dictating general economic trends by becoming the sole facilitator between buyers and sellers, payees and payers, debtors and creditors, savors and investors, bond issuers and buyers, taxers and taxed, etc. In its formative years, high finance’s major activities/operations were, for the most part, discernable. Today it is not only opaque, (not only to the average person) but has also become decidedly destructive to the normal functioning of economies, societies and even nature, establishment rhetoric aside!
Even though the ordinary life of the majority of the human mass is intricately intertwined with global finance, the beast, it seems, has decided to adamantly remain innocent about the underlying scary global financial situation and glibly carries on in its usual simplistic & unthinking ways, to the detriment of its future destiny. The whole idea behind the increasingly esoteric workings of global finance, frankly speaking, is to arrest the inevitable de-valorization of capital, finance or otherwise. To this end, global establishment has embarked on a systemic and continuous transfer of wealth via all sorts of vehicles, from those who earn it to those who don’t. As we never tire of saying, ‘finance is the ultimate rent seeker, without par!’ In the current global economy, wealth is increasingly obtained financially and not by adhering to the old maxim; ‘earning one’s way to riches.’ Those closely attached to financial spigots reap profits while those that are distant, suffer. This is true all over the world from Ethiopia to Estonia from Brazil to Belarus, etc. As a result, mal-investments of all sorts and outright wastes have proliferated the global economic and natural landscapes.
Many productive activities are also used as pretexts by the predator par excellence, to siphon wealth from the unsuspecting beast, via its state and state functionaries, i.e., the politicos and the bureaucracies. The case of outright robbery by high finance is illustrated using infrastructure projects in the world. It was mostly such activities that did us in during the 60s & 70s. The consequence was the straightjacketing of African economies by the likes of Structural Adjustment Programs. At the dawn of the new century however, the practice of unfairly and shrewdly indebting African countries on the account of their numerous infrastructural projects (by dominant multinational organizations, corporate or otherwise) has been somehow subdued, thanks to the assistance of the Chinese government and other economically emerging countries.
The global financial system is at a stage where its activities and operations are focused on speculation and outright Ponzi schemes. Almost all the activities of high finance are now way beyond the effective control of established institutions, be they local, regional, continental or even global! During this seemingly final episode of our world system, the teachings and ideas of astute economists are being systemically discarded in favor of shallow establishment trumps or rather tramps! We cite one non-conventional economist who was ostracized for preaching the truth, at least as he saw it. He argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.
The ‘hedge borrower’ can make debt payments (covering interest and principal) from current cash flows from investments. For the ‘speculative borrower’, the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The ‘Ponzi borrower’ (named for Charles Ponzi) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.
If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.