July 19, 2013 § Leave a comment
The economic vocabulary shapes the semantics of how reality is perceived, and conversely, as Orwell noted, “the decline of a language must ultimately have political and economic causes.” “Protecting savings” and “making savers whole” have become euphemisms for downsizing the economy and sacrificing new direct investment in order to preserve the fortunes of rentiers. While psychologists speak of well-adjusted individuals, economists may ask whether the economy’s debts should be adjusted to the ability to pay, or whether growth and living standards should be “adjusted” (that is, sacrificed) to preserve the value of creditor claims. One may ask similar questions regarding the terms “democracy,” “value,” and “efficiency,” and reality itself…
Addictive demand: Neoclassical price theory is based on the assumption of diminishing marginal utility: The more food, clothes or other consumption goods one has, the less pleasure each additional unit gives. But as the ancients knew, this principle is not true of wealth, especially of money. The more property one has, the more one wants. Wealth is addictive, sucking its possessors into a compulsive drive to accumulate. (See Hubris.)
Agio: Medieval Europe banned usury, but legalistic-minded Churchmen rationalized the practice of charging it in the form of a foreign-exchange fee. Money was borrowed in one country or currency, to be paid back in another at an exchange-rate which incorporated the usury charge in the guise of a money-changing fee (agio). The most egregious example was the “dry” exchange in which no goods actually were imported or exported. This agio loophole helped channel European banking along the lines of short-term trade financing and discounting bills of exchange.
Asset-price inflation: A policy in which the banking system recycles savings and extends new credit to finance the purchase of real estate, stocks and bonds so as to create windfall gains (euphemized as capital gains). The financial boom that resulted from steering pension-plan reserves into the stock market has inspired proposals to privatize Social Security’s wage withholding in a similar way (see Forced Saving, Labor Capitalism and Pension-Fund Capitalism). Meanwhile, property prices are inflated by steering mortgage credit into real estate, lowering interest rates so that higher mortgage debts can be carried, and loosening the terms of mortgage lending, reducing the down payments needed yet minimizing the repayment of principle by stretching out the loan maturity. Fiscal policy contributes to this phenomenon by shifting taxes off of finance and property onto labor (see Tax Shift).
Higher asset prices often are welcomed as increasing net worth (and hence the balance sheet of wealth), as long as the rise in market prices outpaces the growth of debt. But rising property prices increase living costs by panicking home buyers to buy now in order to avoid seeing the rise in property prices outstrip wage gains.
Asset-price inflation goes hand in hand with debt deflation and aggravates polarization as higher prices for homes oblige families to go further into debt. This diverts more income to the financial sector to channel into real estate, as well as into the stock and bond markets.
An inner contradiction of this process occurs as higher price/earnings ratios reduce the income yields on financial securities, while higher price/rent ratios for real estate reduces the ability of rental income to carry the interest and related financial charges. This leads to pressure to reduce property taxes in order to alleviate the financial squeeze.
Asset stripping: Corporate raiders take over companies, cut back research and development spending and other lines of business that do not produce short-term returns, and downsize their labor force in order to make the remaining employees work harder to pick up the slack. This practice is euphemized as wealth creation when its effect is to improve reported earnings. This raises stock prices over the short term, but undercuts long-term growth in production and competitiveness. (See Free Market.) read more
PHOTOGRAPH: Deborah Paauwe