The Morgan Report Newsletter January 2015
Financial System Folly
The financial industry is growing in size and influence, and this is reshaping the culture by placing the focus on short-term profits instead of creating long-term value. According to an International Monetary Fund (IMF) study, once the financial sector becomes too large, it actually inhibits growth and increases volatility.
The IMF’s study found that the economy is damaged when private-sector credit reaches 80 percent to 100 percent of GDP. In 2012, private-sector credit in the U.S. was 183.8 percent of GDP. The growth of the financial sector as a share of gross domestic product is called “financialization.”
Profits in the finance and insurance industries are also outpacing the rest of the economy, and in truth benefit the real economy very little, as much of it consists of pushing paper “financial” instruments around. When nonfinancial corporations such as Ford Motor Company that make more by financing their products than building them are included, the total value of U.S. financial assets was 5 times the country’s GDP in 1980. By 2007, it had doubled to 10 times GDP.
The reason all of this is cause for alarm is that there is a historical pattern in which excessive financialization is followed by economic collapse. This happened to Spain in the 14th century, to the Netherlands in the late 18th century, and to Britain in the late 19th and early 20th centuries.
So this is the backdrop we have stated many times before in TMR. However, you are among the very few who will not only see the situation for what it is, but perhaps by preparing ahead of time, you will be part of the rebuilding process. This is why we are so cautious about the stock market at this time because the financial measuring method, for example the DJI (Dow Jones Industrials), is so far removed from the physical economy that it is due to come down and reflect reality at some point, and this could begin in 2015 at some point.
In the Anglo-American Empire today, the preferred path to building wealth is to “make money out of money,” instead of producing real goods and services. It seems that the BRICS nations are more concerned with the real economy. However, we will address clearly that many in our industry think the entire “resistance” of the BRICS nations is nothing more than a setup, with the banking elite controlling both sides. At this point we are not convinced and so will continue to observe and report as the situation develops.
All of this runs counter to management guru Peter Drucker’s observation in 1973 that, “The only valid purpose of a firm is to create a customer.” Drucker’s insight was that when companies satisfy customers, profits and shareholder value follow. Today, however, profits and shareholder value are put first. This could be shifting, as many outside the elite one percent, as “they” are known, have protested this idea in both peaceful and injurious ways. Signs are appearing globally that many average people have literally taken to the streets to protest the current situation, be it bailouts, food, transportation, bail-in, or any other grievance.
Could it be that financialization is not some nefarious plot hatched by a cabal of greedy people? Could it be the result of people making rational decisions that unintentionally add up to the potential for an economic disaster based upon wording within the system? We will leave the answer to you, but sometimes the plot is not necessarily determined ahead of time and simply “going along with the system” leads to unintended consequences.
What we want our members to know about the financialization is that the recent G20 meeting in Australia has very significant outcomes for you! It was agreed upon that all future bailouts will not be at taxpayer expense but will be taken from the banking system. All creditors (depositors) of the banking system may get “Cyprused” and see that they “bailed-in” their respective bank! Please verify this, as it can be verified rather easily using the Internet. What is not clear is what levels will be used to determine whether your account is going to be used in the process. Some have suggested that if your account is below what is “protected” by FDIC, as an example, your account balance would not be used in the bail-in. Simply, we do not know, and we recommend that all of our readers take action and decide for themselves what the correct amount to keep on deposit would be for your living conditions.
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