> CB: How is it a logical impossibility
> that money was sent away from "home", and
> went somewhere to earn more, because
> it is not earning enough at "home"
Okay, let me try this a different way. Here's how Fitch put the idea:
> 1. A fall in the rate of accumulation, or at least a fall in the rate
> of acceleration; actual profit rates may even rise just before the
> collapse; but the high rates are sustained by a slowing down of
> accumulation rates.
>
> 2. Formation of surplus capital hoards. Unable to return "home" for
> productive re-investment, the surplus seeks to preserve itself by
> moving into financial channels.
Fitch, rightly, is careful to phrase this concept in terms of abstract "capital hoards" that "move" from one place to another. He doesn't try to depict specific human beings choosing to move particular pools money over here rather than over there. But as a result, his argument might appear ambiguous. There are two ways you could theoretically interpret it. Version #1, which I'm almost certain is what Fitch meant, is logically impossible (I'm arguing). But there's another way of interpreting this line - Version #2 - which I guess is not logically impossible but is clearly not the way the actual economy works, and I'm sure Fitch never meant to imply it. On the other hand, I could see how someone who's thinking in terms of Version #2 might object when I say that the argument is logically impossible. So let me clarify.
I'll start with Version #2. It's sort of a literalist reading. It says that "capitalists" began to find real investment less profitable, so they started to invest more and more in financial markets instead, which led to bubbles. The "capitalists" in this version are the actual people who actually own/control nonfinancial companies (a.k.a., "the real economy"). Other types of "capitalists" exist - trust-fund rentiers, hedge-fund managers - but this version obviously does not concern them since they never undertake "real investment" anyway; that's not their job. This version concerns the changing behavior of the specific group of people who are *supposed* to undertake real investment - i.e., the people who own/control nonfinancial companies. So for convenience, let's call the owners/controllers of nonfinancial companies "productive capitalists". The other types of capitalists are "unproductive" (although presumably they would technically include, say, a retired steelworker living off his pension, but never mind).
In this literalist reading, the "productive capitalists" started undertaking less real investment and instead started investing their profits in the acquisition (and trading) and financial assets. This led to bubbles. In order for this to be true, we would have to find that nonfinancial corporations hold non-trivial amounts of financial assets. But anyone who's at all familiar with the balance sheets of corporations knows that nonfinancial corporations hold miniscule amounts of speculative financial assets. They tend to have a bit of spare cash on hand in checking accounts, money-market accounts, and CDs. But that's it. They simply do not engage in significant financial speculation and they never have. That's because the shareholders of, say, Apple Inc., would be furious if they found out that the company's executives have been using their capital to speculate in financial markets rather than make computer products; if they'd wanted their money to be invested for them in financial markets they would have put it in a hedge fund or a mutual fund, run by (supposedly) genuine financial experts, not in a computer company run by computer nerds. So, for example, in 2006 nonfinancial corporations owned a grand total of 0.7% of all credit market assets (i.e., bonds). That included 0.9% of all Treasury securities, 0.3% of all agency issues (Freddie and Fannie bonds), 0.4% of all mortgages. And they owned 3.4% of all mutual fund shares, etc. (You can find the gory details here: http://federalreserve.gov/releases/z1/Current/z1r-5.pdf).
So there's no way Version #2 could be true and I'm 99.9% certain that it's not what Fitch had in mind when he wrote that. He had in mind Version #1, which doesn't deal with particular capitalists or particular pools of money, but rather about the disposition of money in general. Version #1 could be summarized this way: Whereas in the past a certain proportion of the "available funds" in the economy had been used for productive investment, increasingly during the boom years opportunities for productive investment disappeared - so those "available funds" were instead used to carry out financial-market investment. If you look at this statement you can see that it cannot logically make sense unless there is a fixed amount of "available funds" in the economy - unless there are "only so much available funds to go around." Once you recognize that the supply of funds is not fixed, then the lack of profitable real investment cannot have been a *reason* for the increase in financial-market investment. The increase in financial-market investment must have had some other cause.
To show how what I mean, let me give a very simple example (which deals with specific capitalists, just for clarity's sake). Let's say you and I are both capitalists. You happen to own a share of stock. And by coincidence, we both have accounts at the same bank. Okay, I've just earned $100 in profits, so I happily deposit the money in my bank account. Now I have to decide what to do with it: Do I use the money to undertake more "real investment" in my company? Or do I use it to buy your share of stock (thus "sending" the money into financial markets)? I look around and see no profitable real investment opportunities, so I decide to play the stock market. I buy your share for $100 by writing you a check which you deposit in your bank account (at the same bank). But wait! No sooner have I bought your stock than it dawns on me that I've overlooked some really juicy "real" investment in my company that could make me much richer. What to do? I've already shot my wad! My $100 is gone! Or is it? Where exactly did my $100 go? It "went" from my bank account to your bank account within the same bank, which is to say it stayed in the same place. What do banks do with the money you deposit with them? They try to lend it out to someone, obviously. So I'm in luck. I just talk to the bank director and he lends me back the $100, creating a deposit in my account. Now I can write a check to whoever I have to buy the capital equipment from to undertake the real investment.
That's how money is created. As long as money can be created, heavy volumes of financial-market transactions can happen alongside *either* lots of real investment or a very little real investment. There is absolutely no causal connection between each amount. It's like saying: "Those drug fiends in Hollywood use so much coke, there's not going to be enough Coke to buy at the store!" "The price of fish is through the roof! Must be cause all those hippies love Phish so much." Etc.
SA