24 April 2007

Out of sight but not out of mind

Just as most economic activity is now negative rather than positive, so most of the economic value of the economy is debt rather than credit. The whole economic system is being extracted and replaced with debt.

The most obvious example of this is the takeover of major companies by 'private equity' firms, misnamed because they really have no equity but fund these takeovers from debt. If they can persuade the banks to lend them enough money they can, like Archimedes with his unfeasibly long lever, move the world.

Concern has been raised about the loss of accountability when firms move from public, quoted status to private status--and you thought accountability was poor amongst stock-market corporations! Once removed from any scrutiny who knows what may befall the employees and suppliers of these firms? Ruthless maximisation of profit behind closed doors is to be expected.
The most concerning aspect of the activity of private equity firms is the way they allow the expansion of debt and delay the need for adjustment in the world economy, which will consequently be even more painful when it does occur. This was exactly the process that preceded the 1929 Crash, as more and more wheezes were found to deal with the problem that there was no more debt to be had and the pyramid-selling scam had come to the end of the road. This explains the willingness of banks to lend vast sums to 'private-equity' chancers.
Since debt is the commodity banks trade in, the move towards debt-based capitalism can only lead to their owning an ever greater share of the economy. Most people aged under 40 belong to the bank, as a consequence of vast mortgage and student-loan related debt. Companies facing hard times are likely to find banks eager to swap their equity for debt, a way in which the bank can come to own something of real value (a functioning company) by creating something with no value (bank debt).
As the economy becomes hollowed out only those with a risk-averse attitude and a willingness to take on frightening levels of debt are able to thrive.

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