Finance 202: How We Became Debt Slaves

Finance 202: How We Became Debt Slaves
(And Learned to Love It)

By Gordon Arnaut

May 14, 2010 ""Information Clearing House" --- Who is in charge of these United States?

If you guess that it’s the people with the money, then you are correct. Not the elected representatives of the people. Not the men and women in uniform, not the factory workers, or farmers, or teachers, or bus drivers and pilots. Just the guys and gals with the moneybags.

Right now, the US Congress is holding hearings about bank wrongdoing. It is very entertaining kabuki theatre, but nothing will change. The Goldman chief (thief?) and his cohorts may take a bit of a grilling, but behind the scenes his bagmen are funnelling millions of dollars into the campaign trunks of every representative, senator (or likely hopeful) in the land. Real, meaningful financial reform is a certain impossibility.

Let’s look at some hard numbers. The financial sector in the US and other Western nations is about a third of the total GDP right now. That is more than any other industry and is about equal to total government expenditures—on military, social services (such as they are), education and health care (such as it is), infrastructure, R&D, etc.

If you look at corporate profits, the financial sector takes an even bigger slice of the pie, about 40 percent overall. The financial “industry” is in control of this country. It makes the most money, it contributes the most grease to the machinery of politics, and it has a stranglehold on that vital commodity we call money—deciding who can have it and who can’t.

Now the average Joe or Jane might ask what is wrong with having a prosperous financial industry? Well, the problem is that finance is not an industry, by any definition of the word. Finance does not create wealth; it actually takes out wealth from the real economy, by means of interest. So if the financial sector is one third of the GDP, it means the rest of us are one-third poorer than we need to be.

“You can think of the financial sector as being wrapped around the real economy… like a parasite, says Michael Hudson, an economics professor at the University of Missouri. “Now the key thing about parasites is that it's not simply that they extract nourishment from the host. The parasite takes over the host's brain, to make it think it's part of the economy, to make it think it's part of the host's own body, and, in fact, that it’s almost like a child of the host, to be protected. And that's what the financial sector has done today.”

That would explain why so many ordinary people continue to act in the banks’ interests, and opposite to their own financial well-being. Many teabag commentators say they are opposed to taxes. But they do not seem to mind the 33 percent tax they are paying to the financial industry, far and away the biggest tax bite of all.

Consider for example the house in which you live, which, if you are like myself and most people I know, was bought with money borrowed from the bank. If you borrowed $150,000 from the bank to buy your home, you will have paid back to the bank about $400,000 by the time you pay off your mortgage, many many years from now.

If you go and buy a new car for $20,000 about half of the price of that car is the built-in cost of interest payments that the car manufacturer and his suppliers have had to pay to the bank in order to build that car and bring it to market in the first place.

Now it doesn’t take a rocket scientist to see the direction in which the money is flowing. And the means by which this money transfer is accomplished. The bottom line is that the 33 percent of GDP that is the financial sector’s slice of the pie (about $5 trillion dollars), comes directly out of the pocket of you and me and every other “consumer” that buys any product in this economy, or makes use of any credit provided by the banks and other players.

One has to ask the question: At what point does the financial parasite drain so much from the host, that the host becomes sick and dies?

The answer to that question is playing out right now. The so-called Financial Crisis is the first convulsion of an unsustainable system that is buckling under the stress of a finance sector grown way too big for the real economy to carry. The real economy has been flattened. Jobs, especially good jobs, are scarce and getting scarcer all the time. Industry has been outsourced. Even the professional-managerial-small business class (which is only about 20 percent of the population), is in decline.

It is useful to look at history to put the present situation in context. One hundred years ago, the entire financial sector was in the low single digits of GDP. Even by 1990 it was just over 20 percent. In just the last 20 years, the finance sector has grown by half! At the same time, many economists tell us, real earning and spending power has declined. Is there any doubt why? As the parasite monster grows, our household finances collapse.

How did we get to this situation? When did finance stop becoming a helper of the real economy, and start becoming a drain on our lifeblood? Even Hitler provided virtually interest-free home loans to new families, and a maximum loan term of 10 years, with payments not more than 1/8’th of the average worker’s wage. But we in this “free” society, have a lifelong debt burden and 50 year mortgages! In the middle ages, we called that serfdom. Or indentured labor.

The problem is easy to see. We have built a society whose ideological foundations are made of quicksand. We need to reappraise everything we have been told about our system, before the system collapses for good. Not all economic activity is equal, as we are led to believe. It is useful to go all the way back to Aristotle, who had some interesting things to say about the relative merits of various kinds of economic activity:

“There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural."

Looking at these wise words, it seems we have strayed a long, long way from the true path. We worship money as god almighty, and the hustlers of Wall Street are held up as role models. How have things changed? Is the toil and industry of the household no longer the honorable way? Notice that even retail trade comes in for “censure” and necessary oversight because it is about gaining at the other man’s expense.

And then what of the money trade? That most “unnatural” of all ways of getting wealth. Should these hucksters and flim-flam men be left to do whatever they please? As they do now. Should this activity even exist? Why? And for whose benefit?

Maybe our wise leaders in congress and elsewhere should sit down in their fancy chairs and take a good long look at these ancient words. And think about where this unnatural road that they are leading us down will ultimately end up.

Gordon Arnaut is an aerospace engineer in the civilian sector and a freelance writer. He lives in Ontario, Canada - goarnaut@yahoo.com