Nicholas von Hoffman on Kevin Phillips’ ‘Bad Money’

Posted on Oct 31, 2008

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By Nicholas von Hoffman

      Americans, rich or poor, have consciously or otherwise bought into the master-nation proposition that really bad things do not happen to the USA. We might suffer setbacks and commit a blunder once in a while, but we are too big, too rich, too smart, too powerful and too blessed to be visited by a national catastrophe. That the whole goddamn economy could melt right out from under our feet is an unimaginable event, an occurrence out of history when crackly voiced recordings captured President Franklin Roosevelt talking to the Okies.

      Such disasters may overtake Argentines or Malaysians or Bulgarians or Russians or even, occasionally, the English, but not the red, white and blue über-nation. Yet in the space of a year the U.S. has gone from über-nation to under-nation, or at least a nation under water as hundreds of thousands have lost their jobs, been tossed out of their homes and seen the savings of a lifetime decimated. Americans have seen many of the most respected business institutions revealed as organizations run by confidence men whose cupidity is yoked to their pride and their stupidity in believing that they could run their ruinous games forever.

 

      At this juncture the dimensions of the disaster are not clear. An honest count would show 10 or 11 percent of the labor force is out of work. If the numbers continue to climb at the present rate, by this time next year they will begin to match those of the gray days of the New Deal era.

      By then we may begin to tell each other that none of this misery had to happen. There was no end of warnings and no one was more prescient or more persistent in foretelling what lay in store for us than Kevin Phillips. In the long run up to the vortex, Phillips was one of those who repeatedly warned of what was coming. No one did it more cogently, more learnedly and more forcefully than he.

      In his new book, “Bad Money,” Phillips discusses why so few paid attention to a topic so important to their own well-being.

      “Many people today think that today’s finance is too complicated for ordinary citizens to fathom or handle. Bubbles aside, other financial terms used by the media—credit derivatives, securitization, and even current account deficit—do not lend themselves to conversations in neighborhood bars or beauty parlors. Americans are excusing themselves accordingly,” writes Phillips. “Still, if the farmers of more than a century ago could study and understand Sherman Silver Purchase Act provisions and details of the nationwide currency shrinkage—and many studied and somehow managed—can’t we expect as much today?”

      Answering his own question, Phillips says, “Alas, probably not,” and, given that many 21st-century Americans have the power of concentration of a flea with attention deficit disorder, one cannot argue with him.

      Had they heeded what he was saying, the disaster engulfing them and much of the world might have been mitigated. But it is still not too late to learn from Phillips. “Bad Money” is a map describing the economic terrain in which we are struggling to stay upright and slightly solvent. It is a clearly written treatise demanding no knowledge of Greek letter formulas, one which ought to command the attention and interest of such non-fleas as there may be left among us.

      For them this is a useful book because it does not address bailouts and the other hysterical emergency measures which dominate the news, stopgap remedies and economic analgesics though they may be. Temporary relief from pain not withstanding, Kevin Phillips lays out the actualities which must be dealt with before the throbbing will stop.

      He begins by describing a distorted economy whose profits have no material reality other than notations on paper or electronic digits. That is the bad money from which the book draws its title, sterile money, not so much earned as won by financial manipulations and “products” whose names we have just recently learned, to our loss.

    Phillips quotes Raymond Dalio of Bridgewater Associates: “The money that’s made for manufacturing stuff is a pittance in comparison to the amount of money made from shuffling money around. Forty-four percent of all corporate profits in the U.S. come from the financial sector compared with only 10 percent from the manufacturing center.”

      Sixty years ago, Phillips writes, about 30 percent of the American gross domestic product was attributable to manufactures and about 10 percent to financial. The numbers now are approximately reversed. Until recent times the United States made its living across the globe by selling manufactures and raw material. In our time, however, under the aegis of the new economy the nation has tried to live by selling nugatory services of a vaguely financial nature to foreigners who have not been buying enough to keep the American economy from going deeper into the red, year upon year.

      “… [T]his faith in finance was not new, but old—and it played wayward Pied Piper to prior leading world economic powers,” Phillips writes. “On the edge of decline the Spanish had gloried in their New World gold and silver; the Dutch, in their investment income and lending to princes and czarinas; and the British, in their banks, brokers, and global financial network. In none of these situations, however, could financial services succeed in upholding the national preeminence that had been earlier built by explorers, conquistadores, maritime skills, innovative science and engineering, the first railroads, electrical dynamos, and great iron and steel works. Invariably, power and greatness passed to new explorers, innovators, and industrialists.”

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