Economics for dummies - Part 3

( - and for economists and politicians)

Part 3  Finance+

The economy is basically global. It is not restricted to national states.

Most of its rules of the game have their origin in the US, but are accepted, implemented, and maintained under the umbrella of international organizations like IMF (International Monetary Fund), The World Bank and WTO (World Trade Organization), related to the UN system.

Money now has hardly any restrictions passing in or out of almost every country in the world. Multinational corporations have become increasingly important with activities reaching all over the globe organizing production and trade of goods and services. Most of the global trade is handled by a network of multinational corporations. Trade is almost only related to national states because goods are passing national borders.

Trade is, however, restricted by intellectual properties and trade agreements enforcing intellectual properties. Intellectual property means ownership to specific knowledge obtained and formalized. Intellectual property has made it possible for companies like Google, Apple, and Microsoft, to become the largest companies in the world.  Intellectual property is also essential for how pharmaceutical and giant agricultural companies operate.

National states used to put regulations on companies and their projects and activities. In a global world there are, however, few regulations for the multinational companies. They can operate almost as they like especially in weak or corrupt national states. There are no global regulations balancing them.

Further-more money is no longer simply a way of facilitating trade with goods and services. The trade with money itself has become much more important than the trade with real goods and services.

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This leads us to a closer look at the financial sector.

The financial sector has gradually but rapidly become bigger and more powerful.

As we have already seen the growth is to a large extent not only based on facilitating the development of real-world products and services, but on a market of speculation.

The new digital sector goes very well together with the financial sector. The stock market is to a high degree based on future expectations, not on results obtained. The digital sector has few limitations for growth.

The present economic rules of the game imply that it is only the stakeholders of a company and their profit that matter, not employees, local society or society at large.

Profits from this speculative financial sector have consequences in many sectors of society, examples are the creation of problems in the housing market in many cities and supporting a market for extreme luxury.  

The basic raw material for the financial sector is debt. Debt also means risk.

You may have noticed that tax havens like Cayman Islands have been exposed in the press.

Tax havens are possible through secrecy and complicated juridical arrangements.

Money is placed in tax havens to avoid tax and contribution to society at large. Tax havens gives opportunities also for corrupt regimes, power elites and all sorts of crime.

We might get the impression that tax haven activities are something seldom and exotic. This is, however, not at all the case. They are a normal, central, integrated part of the financial sector. All-together USA and UK and their financial institutions are the largest players, but banks and financial institutions in most national states also contribute. The world´s largest banks, legal companies and consultant companies play a central part in keeping the system going.

This global establishment covers up a lot of bad activities.

The amounts of money handled and accumulated in tax havens are enormous. For many developing countries the amounts leaking to tax havens outnumbers foreign aid by far.

Money in tax havens are resources taken out of the running productive economy. If you for example would use such money to give to poor people to buy food in a country, food must in the first place be physically available there basically through local production.

The financial sector is on top of a system where short-term profit is the norm. This means that also other actors like big multinational companies are forced to prioritize short-term profit instead of their long-term thrive and the best for society at large. Many companies use more and more of their resources on financial activities at the cost of the long-term aspects of their core business. These mechanisms drip down to most participants of the economy.

Hedge funds are funds created for the purpose of spreading risk. Nobody is after all responsible for anything. Most hedge funds also use tax havens. Investments are basically prioritized and evaluated by their short-term financial profits not by their creation of useful projects “on the ground” and the benefits for society at large. Also, public funds like the Norwegian Government Pension Fund Global basically operate by such principles and mechanisms. Funds named “green” hardly provide a real solution to the core problematic consequences of the financial sector.

A sound project «on the ground» need financing, but it also need management, organization, follow up and maintenance, knowhow, and motivation. Corruption must also be avoided. When focus is only on finance and financial goals, what is needed «on the ground» is often underestimated or even forgotten.

A sound project should have a set of goals for the benefit of society at large, local community and workers. The single focus on finance and short-term profit means a clear contradiction to such goals.

A special branch of speculative economy is crypto currency. A basic idea of crypto currencies is to avoid a central instance confirming and controlling transactions. It allows for secrecy and gives opportunities for players that prefer secrecy. The production of crypto currencies consumes very much energy and is highly hostile to climate.

A basic goal for the economy is stability and predictability. An economy with a high proportion of speculation and debt, means an economy with a high degree of risk of instability. Remember the financial crisis of 2008. By the way, this crisis was not predicted by mainstream economists.