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Commentary :: International
Crash on the Horizon
16 Mar 2018
The systemic reasons for the crisis are more important than a sudden fall in prices. Stocks are held on average 22 seconds, not 6 months or ten years. Real-capitalism is a plus-sum game. Financial capitalism is a zero-sum game. Profit is made at the expense of others. "Love for money" replaces trust.

By Stephan Schulmeister

Exchanges. The systemic reasons for the crisis are more important than a sudden fall in prices

[This article published in Freitag 08/2018 is translated from the German on the Internet, Blue Lightning, a little-known super-hero, can drag the whole world into ruin in a few seconds. Stocks are held on average for 22 seconds, not 6 months or 10 years.]

The more ridiculous the speed of exchange trading, the greater the media's attention is riveted on sudden price fluctuations. So the losses two weeks ago were a great theme. Still, every great price movement is the result of millions of transactions; its motives are not identifiable.

Trying to understand the game in its totality is more useful. I interviewed foreign exchange traders in Frankfurt for two days. The traders explained their "technical" trading systems to me. They were based on algorithms that were still simple and only recycled past prices…

My analyses showed: speculation systems are mostly profitable. Experience was necessary; some "traps" existed for amateurs. Trading became ever faster. Today, high data frequencies are used. Complex algorithms are needed for higher profitability.

All systems aim at "trending" speculative prices. These change in phases. The "trend-following systems" sprang open in the early phase (buying when things were looking up). "Contrarian systems" for a counter-movement were supported in the late phase. In their totality, speculation systems strengthen the models and speed of the price dynamic.

If an optimistic market mood ("bullishness") dominates, traders react more strongly to good than bad news and "invest" more in a "run" upwards than downwards. Therefore, upward trends last somewhat longer than counter-movements. A bull market develops gradually over several years. A bear market forms analogously. Doubt in its continuance grows with the length of a bull- or bear market. The consequences are manifest in the real economy. So an increasing over-valuation of a currency dampens exports and growth. Thus, every bull- and bear market prepares the ground for its end. Therefore, the financial world reacts so nervously to the latest exchange losses. The market values of businesses more than tripled since 2009 although their "true" values stagnated for want of real net investments. Thus a bear market is being prepared.

Does money work?

I grew up in the 1950s and 1960s. With stable exchange rates and stock prices, raw material prices and interest rates, the pursuit of profit could only develop in the real economy as in China for nearly 40 years. Full employment, development of the social state and declining state indebtedness were consequences of the "real capitalist game," nor "miracles." Maybe the "happiness of early birth" led me to the hypothesis: "The finance capitalist game" is the main systemic cause of Europe's crisis.

For almost 50 years, exchange rates, raw material prices and stock- and bond prices fluctuated in a sequence of bull- and bear markets. This has three main consequences. The valuation changes cause oil price shocks and debt- and financial crises. Businesses shift their pursuit of profit from real- to financial investments. The mentality "Let our money work!" spreads.

After the 2000 stock crash, three bull markets for stocks, raw materials, and housing built up an enormous "crash potential" that erupted in three 2007/2008 bear markets. For nearly 50 years, the business sector accumulated much more financial capital than real capital. Economic growth fell; unemployment and state indebtedness rose. These problems were understood as consequences of over-regulated labor markets and the social state, not as results of deregulated financial markets. Their weakening became a "practical constraint" and expanded the jurisdiction of financial management, particularly in old-age provisions. All this was legitimated by a theory that understands persons as only selfish beings. However, financial capitalism nourishes another selfishness tan real capitalism. The more the others lose, the more a trader wins. On the other hand, an entrepreneur has to consider the interests of his suppliers, customers, and co-workers.

Real-capitalism is a plus-sum game. Profit is made together through the production of "bigger cakes." Social conduct pays off in the sense of interaction. In its pure form, financial capitalism is a zero-sum game. Profit is made at the expense of others. Thus, egoistic conduct pays out. "Love for money" replaces trust…

Financial-capitalist "rules of the game" destroy themselves because economically more and more financial assets are created that do not have a real-economic coverage (overpriced stocks, rotten credits, government bonds), socially because inequality increases more and more and politically because more and more people turn away from the traditional parties that lost identity and orientation through "market religiosity."

Different ways are possible after a financial meltdown. In the depression after the 1873 stock market crash, the workers' movement organized and carried out many advances in small steps, especially Europe's greatest political innovation, the social state. With his New Deal, Roosevelt successfully forged a broad alliance after the 1929 stock market collapse. In Germany, the traditional parties completely disintegrated. Hitler's promise of social warmth and order in the national community was attractive. After the 2nd World War, Europe's elites had a common real-capitalist social state "navigation map" on the basis of Keynesianism. Politics was for citizens but less and less with them. Politics was occupied first with the reconstruction and then with consumption. Moreover, the achievements of the social state seemed secure forever so "defensive maneuvers" were unnecessary.

Therefore, the neoliberal "counter-offensive" "only" had to convert the elites to "market religiosity." Their greatest strategist Friedrich A. von Hayek formulated in 1948: We must "convert the intellectuals to our faith." Then the rest will take care of itself. In fact, this worldview reproduces itself through the production of economists since the "neo-liberalization" of economics. Simultaneously, those problems were created by the "unfettering" of the financial markets that make dismantling the social state and privatization of politics into practical constraints.

The coming financial crisis can hardly be changed for the better without enlightened elites, enlightened citizens and "navigation maps."

Comment by Freitag reader:

"Let money work!" is such an ironic heading! Such a sentence means one does not look beyond one's plate. Money doesn't work. Doesn't everyone know that? The illusion that money can work leads to disaster, not only into a destructive financial capitalism when the real economy is wiped out and devalued. This phase of instability leads to capital's attempted transformation. People speak today of the digitalization of capitalism… Transformations - steam engine or Taylor/ Fordism - produce vast misery through the total restructuring of society. This crisis principle is very well-known. Thus, capitalism functions according to plan. The crisis phase is the most attractive phase – at least for the winners. Capitalism also needs very many losers. That is the crisis principle. The crisis of one is the profit of others; the crisis of many is the profit of a few… Capitalism even adopts the planned economy if necessary.

Thus the question is not between real economic capitalism and finance capitalism. One is not possible without the other. It is not the question, capitalism or no capitalism.

Is democracy the hypocritical fig leaf of modern capitalism?... Capitalism and democracy have nothing to do with each other; they contradict and are incompatible. Capitalism is a hierarchical structure and social order. Democracy is egalitarian. The best one can do is fight for a democracy. If democracy is attained, the problematic around predatory capitalism and its programmatic crisis principle would be quickly solved in a democratic way. In a democracy, the many losers will speak out for the programmatic losers in capitalism. Democracy leads unavoidably into a non-hierarchical solidarity society, a kind of communism without hierarchy.

If democracy is not attainable, capitalism's nature will become much clearer. Capitalism will prove to be an indoctrinating and totalitarian rule system that makes the free will, freedom, and life into commodities that only the winners can buy because there are so many losers… The many losers recognize that democracy in capitalism is a lie. Who are fought in the war in capitalism? Obviously, the losers are fought. They fight against each other – structurally, socially, economically, systematically, and paradigmatically. They divert from problems and ideological causes to protect the crisis principle, the paradigm of capitalism and the rule system, the property established in the crisis of others after it was invented "4500 years ago in Persia."
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