The slump of the cryptocurrency, Terra, is another reflection of the upside down world of finance, where value is quite literally in the eye of the beholder.
It is a world where techno-giant companies can have share values that bear little or no relation to their underlying profitability. Where companies are so flooded with cash that they buy back their own shares rather than – heaven forbid – make a windfall contribution to public welfare.
It is a world where shares traded for ever-increasing value and houses rocketing up in price are seen as evidence of healthy growth, not inflation. Where finance is so distanced from the real economy that it survived the pandemic relatively unscathed.
Why is there one set of economic rules for the real economy and a mirror-reversal of those rules in the looking glass world of finance? Where private equity investors saddle the companies they buy with the debt used to buy them; where money can be made by shrinking rather than expanding actual goods and services. Where privatised public infrastructure and service providers like Carillion load themselves with huge levels of debt, with pitiful cash reserves, when the governments they have replaced would be castigated for borrowing such huge amounts Where private owners can build super-yachts while their companies flounder.
In recent years new, opaque, forms of speculative finance have emerged that can only be described as gambling. Winning or losing depends on calculation of the odds of particular movements or outcomes. The massive growth of this ‘derivative’ activity nearly brought down the banking systems of the most financially entangled economies (particularly the US and the UK) in 2007-8. In the looking glass world of finance such activities were not prohibited, but enhanced by the creation of vast quantities of money for the financial sector through the ability of central banks to create money out of thin air.
In the real world, the looking glass world of crypto-business – selling things that don’t materially exist – would be seen as a scam. However the non-tangibility of crypto-assets is seen as a source of their value as in the celebration of the non-tangible uniqueness of non-fungible tokens (NFTs) such as digital art.
What can be done to bring the financial sector back through the mirror? First, the existence of financial inflation should be recognised. There is too much money chasing too few socially useful investments. Purely speculative activity must not be funded by bank loans and must be taxed as gambling. Genuine investment should be linked to the provision of actual goods and services and shares should have to be held for a minimum time. Instead of the looking glass lunacy of financial markets, there needs to be a focus on the real productivity of the economy and the needs of the populace. We need money for the real world, not the world of smoke and mirrors.
By Professor Mary Mellor author of Money: myths, truths and alternatives