Monday, July 5, 2010

Response to Pettis on Real Economics


Response to Pettis: http://mpettis.com/2010/07/what-do-banking-crises-have-to-do-with-consumption/.

Reading this excellent analysis one would hardly guess that money isn’t real wealth, and that the banks and other financial entities are merely facilitating the real economy. So what is going on in the real economy. Spending is a mix of people with the money (ex-savers) and people who intend to earn (who will be in debt after the spending). Also production is a mix of production for immediate consumption and creation of infrastructure for future production. The job of the financial system is to keep the balance between these things optimal. The situation today is that oil is getting harder, otherwise we wouldn’t be drilling at unmanageable depths. So we are perforce changing infrastructure (which started long ago when we stopped using oil for large electric power plants). So the optimal balance of activity needs to be skewed away from immediate consumption and towards creation of new infrastructure. It rather seems that our current financial system’s (unconscious) plan is to completely destroy the economy then rebuild it. Is this really necessary, or desirable?