People can attempt to downsize or live frugally to stretch their dollars, but the banks, in contrast, will ride the wave of inflation. Their omnipotence is stunning. Because they also offer second mortgages, they can enjoy an equity rise before the owner sells or dies. No matter what strategy one pursues, saving or spending, investing or working, it is to the advantage of the banks.
Interest payments reveal the same power of doubling as the markups involved in selling an apple, as discussed in Chapter 4, What is Inflation? The selling of money creates inflation just like the selling of a product. We are doing the same thing with land values. We cannot live without land, food and labor to trade. Everyone alive and every organization is caught in the same trap.
Banks exert control of the economy by lending or not lending, and they create another set of winners and losers by the rates they use. Also, there is always a new generation entering adulthood and independence. The banks have a captive population. Slavery and child labor have given way to a perpetual debt trap in America, and youngsters in third world countries have lost their agrarian livelihood to become the new equivalent of America's early 20th century child labor. Living standards may have improved in America, but the underlying systemic injustice of feudalism and slavery endures and spreads.
Banks thrive from the constant flipping and inflating of real estate. If the homeowner sells before the terms of the note, then the bank gets to restart the loan at the newly inflated property price. If the buyers pays off the note early and stays in the home, most of the interest has already been collected. The contract structures repayment by the Rule of 78's. Half of the interest will have been paid in the first ten years of a thirty year note. Refinancing and new mortgages are always to the bank's advantage. Even when the interest rate drops for the borrower, the bank can come out father ahead by adding more years.
Banks are willing to fund risky speculators in real estate and business because lending is how they survive. Businesses need customers, bankers need debtors, and their needs intersect. Banks will loan to a landlord to build a mall, then fund the businesses that rent the space, and finally fund the buyers of the goods at the stores. It would seem that nobody can live without banks, which is why we need to make major changes.
Bubbles and Real Estate
Economic bubbles begin within a particular sector of the economy and eventually effect the local real estate. For example, the first technology bubble fed the real estate boom of Route 128 outside of Boston, Massachusetts and the latest one drives real estate prices in Silicon Valley, California. The real estate of Hollywood and Los Angeles, and much of California, are supported by the multiple bubbles of the entertainment industry (movie, TV, cable, music), whereas New York City is the center for theater and banking. The more expensive the land, then the more expensive the product created there, and vice-versa. The rise and fall of Detroit followed the fortunes of American automobile manufacturing. Boom and bust are never absolute. There are always multiple small and large bubbles building and bursting.
Despite all the advantages that banks have, they are still subject to conventional budgetary pressures. Ponzi mathematics are the bias of modern finance, and even banks need perpetual growth to survive. They too drawn into the volatility of foreclosures, bankruptcies, and changing demands of the marketplace. We all must reap what we sow. Banks, however, have an extra lifeline. As the bailout of 2008 demonstrated, banks benefit from their direct relationship with the Federal Reserve system. Under capitalism, the winner is determined by who has the most credit. Nobody has more access to ready credit than the banking industry. At the height of the crisis, they got an infusion of almost one trillion dollars overnight. The same amount could have forgiven every mortgage in the nation. The government and the banking industry are ensconced within a gilded cage.
Understanding Wall Street
Wall Street manufactures its own chit, called stocks, that are sold in exchange for the government's chit, money. Most businesses buy and sell a product, or buy and sell labor as a service. A business privileged to be listed on the exchange has a new secondary product: stock certificates. These are sold alongside its main products. Secondary buyers purchase these new chits in an attempt to sell them to other secondary buyers for a profit. Wall Street is involved with the constant selling of stocks whose cost changes by the minute! There is no other product like it in the world. There is no mathematical reason why the values change, they just do.
Value changes are determined wholly by the opinions (delusions?) of the participants. While nominally tied to the health of the business, it is very common for a stock to rise while the business is struggling or losing money. In this artificial world, bad news can be when expectations are not met, even if the actual profits of the business have increased. Conversely, there is no bad news, if expectations are met. Even losing money can drive up the share price. Long-term, everyone wants the stock price to rise.
Only relatively recently has a new breed of investor arrived, where they bet that the stock price will fall. They gain by finding and convincing someone else to believe that the price will rise, and getting a commitment to purchase future shares at the current price. That way, when/if the price falls, they buy them at the new lower price and sell them at the previously agreed to price, which is now higher. The buyer is betting that the opposite will happen. They think the price will rise, and will be able to purchase a block of shares at a low price, and immediately sell it at the high price. They are not betting within the marketplace, per se. It is more like a boxing match, each side is trying to harm each other. It is an odd double-jeopardy, because their buying and selling is itself altering the market they are trying to predict and manipulate.
Wall Street has many tertiary levels of players playing-the-player-playing-the-player. Even without intentional fraud, it is a marketplace of the make-believe. Only because a real business is associated with the stock does it seem plausible. Dividends from the business reinforce the illusion of joint ownership. Bitcoins represent a new territory. They are stocks being represented as currency, and devoid of any association with an actual business.
The kindest explanation of the stock market is as a system of perpetual interest for a loan that cannot be repaid. Investors do not own the business, rather, the original owner(s) have signed a mortgage for the cash they received. Stocks are then traded in the same way debts are sold to a collection agency. There is no demand date, the shares are just sold. Dividends on the shares represent an interest payment, and the principle is never paid off.
The workers at the public companies are bound to these mortgages by proxy. They must generate the profit to pay the interest dividend. The original founder and Board of Directors control a lot of the shares, giving themselves multiple sources of revenue: wages, dividends and stock value. The same is not true for the workers. They are wage-slaves. A 'shareholder' of a business is actually a 'slaveholder.' For them to profit without labor, then someone must labor unpaid. Public corporations are a modern version of slavery. The chains are fiscal rather than physical.
When employees own shares of their employer, which is quite common, they are in the odd position of being slaves of themselves by proxy. The only exception being the original employees who were promised shares before the company went public. In general, that group was overworked and underpaid as a condition of the promise of a future windfall. Those who follow are overworked and underpaid, and never get a windfall.
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