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The two hemispheres of the financial economy

from Joseph Huber 

Since the dotcom crisis (2000), subprime and banking crisis (2008) and the euro sovereign debt crisis (2010–12) the public is critical of the financial industry. Bubble economies should be prevented, money ought to serve the real economy rather than questionable financial dealings. However, putting it this way is not yet appropriate. One cannot separate the economy from its financing. The modern economy is a credit economy. Most invest­ments are paid only to a lesser extent out of current earnings and provisions made, while the bigger part is pre-financed by credit. Nevertheless, opposing the real economy to the financial sector has a point often disregarded by orthodox economics, which is, that wide areas of the financial economy no longer have anything to do with financing the real economy.

The relevant dividing line does not run between the real economy and the financial economy, rather between the two hemispheres of the financial economy: on the one hand those areas that contribute to financing the real economy, on the other hand those areas that do not contribute to financing economic output. In short, the dividing line runs between GDP finance and non-GDP finance.

Typical examples of non-GDP finance include secondary trading in bonds, shares and other securities (i.e. after their initial issue), forex trading without a background of actually making use of a respective foreign currency, derivatives trading beyond the hedging of existing risk positions, trading in real estate as a financial investment without significant change in a property’s use value, as well as leveraged financial trading of any kind. Further clarification of the terms real economy, GDP finance and non-GDP finance is provided in the Annex.

Non-GDP finances are largely independent of GDP finances, but are ultimately dependent on the real economy. Real-economic business cycles and structural change affect the financial cycles in bonds, equity, commodities, real estate and other financial investments, as these in turn affect real-economic cycles.

Money that does not flow into the real economy has no effect on real-economic quantities and prices, and therefore has no direct impact on producer and consumer price inflation. Money that flows into the financial economy, whether in GDP finances or non-GDP finances, influences asset prices (asset inflation) as well as the quantitative expansion of financial-market supply.


  1. Ken Zimmerman
    March 18, 2021 at 10:44 am

    Most historians of the United States (and before) agree that Alexander Hamilton saved the United States after the Revolution through his changes to the US economy. One of these changes was establishment of a US National (public) bank. Modeled along the lines of the Bank of England, a central bank would help make the new nation’s economy dynamic through a more stable paper currency. The bank would also provide the financing needed for American businesses to operate and to make them independent of foreign competition. With a public bank in place there was little need for a US private financial sector except to foment speculation in the value of money and money surrogates such as stocks, bonds, etc. So, I do not agree with the position in this post that, “The relevant dividing line does not run between the real economy and the financial economy, rather between the two hemispheres of the financial economy: on the one hand those areas that contribute to financing the real economy, on the other hand those areas that do not contribute to financing economic output. In short, the dividing line runs between GDP finance and non-GDP finance.” It is my view that the relevant dividing line in terms of finance is between public financing of American commerce through a public national bank and the financing of that commerce through private sources that always run the risk of giving into the temptation to finance for the profit of the private financialists rather than the welfare of the nation’s economy. Simply put the economic welfare of the nation must never be allowed to rest on the gaming club of private financial investors. If the national bank can find a use for such investors and can control them sufficiently to ensure this welfare is protected is the only circumstance in which their financial input into American commerce should ever be allowed. It should never be the intent of the American economy to support the recreation and gambling of groups of lay about louts.

    • Craig
      March 18, 2021 at 5:44 pm

      Correct, except you can’t cut off every one of the heads of the hydras at the same time and even if you do each still grows two more out of the stub. It’s the problem/lesson of palliative reforms expressed. Private finance must not be allowed to create money, only aggregate already created amounts of it. And even then such aggregative funds must be firmly and ethically regulated. Public finance must become ascendant.

      And even then one still hasn’t addressed the philosophical and temporal universe problem of the current monetary and financial paradigm of Debt Only. The new paradigm of Monetary Gifting must be integrated into that current monopolistic system. No more endlessly fighting the hydra on merely the temporal level. Change its philosophical and ethical nature….and turn the tables on the problem and its elites.

  2. Ken Zimmerman
    March 20, 2021 at 11:15 pm

    This is not cutting off multiple hydra heads. It is nearer to returning to what we had than an attack on hydras.

    According to historians “Theodore Roosevelt is widely regarded as the first modern President of the United States. The stature and influence that the office has today began to develop with TR. Throughout the second half of the 1800s, Congress had been the most powerful branch of government. And although the presidency began to amass more power during the 1880s, Roosevelt completed the transition to a strong, effective executive. He made the President, rather than the political parties or Congress, the center of American politics.” (Miller Center)

    But TR was more than just the President who elevated the Presidency. He also was the spokesperson for the just emerging post Civil War American culture. Based around the new metropolitan areas of America, the culture marked the end of the frontier and the consolidation of liberal Christianity, regulated commerce, citizen commitment to civil and human rights, and American communitarianism (responsibility of the individual to the community and the responsibility of the community to care for its members). Called ‘Progressivism’ by some and Modernism by others, the new culture created two immediate effects. It reshaped American society for more than 80 years (till the ‘Regan revolution’ of the 1980s) and set up a strong and often violent reaction from conservative and reactionary sectors in America. Particularly from racists, plutocrats, authoritarians of many versions (including religious), and foes of democracy.

    TR’s first Presidential inaugural speech shows us some of these new directions.

    “My fellow-citizens, no people on earth have more cause to be thankful than ours, and this is said reverently, in no spirit of boastfulness in our own strength, but with gratitude to the Giver of Good who has blessed us with the conditions which have enabled us to achieve so large a measure of well-being and of happiness. To us as a people it has been granted to lay the foundations of our national life in a new continent. We are the heirs of the ages, and yet we have had to pay few of the penalties which in old countries are exacted by the dead hand of a bygone civilization. We have not been obliged to fight for our existence against any alien race; and yet our life has called for the vigor and effort without which the manlier and hardier virtues wither away. Under such conditions it would be our own fault if we failed; and the success which we have had in the past, the success which we confidently believe the future will bring, should cause in us no feeling of vainglory, but rather a deep and abiding realization of all which life has offered us; a full acknowledgment of the responsibility which is ours; and a fixed determination to show that under a free government a mighty people can thrive best, alike as regards the things of the body and the things of the soul.

    Much has been given us, and much will rightfully be expected from us. We have duties to others and duties to ourselves; and we can shirk neither. We have become a great nation, forced by the fact of its greatness into relations with the other nations of the earth, and we must behave as beseems a people with such responsibilities. Toward all other nations, large and small, our attitude must be one of cordial and sincere friendship. We must show not only in our words, but in our deeds, that we are earnestly desirous of securing their good will by acting toward them in a spirit of just and generous recognition of all their rights. But justice and generosity in a nation, as in an individual, count most when shown not by the weak but by the strong. While ever careful to refrain from wrongdoing others, we must be no less insistent that we are not wronged ourselves. We wish peace, but we wish the peace of justice, the peace of righteousness. We wish it because we think it is right and not because we are afraid. No weak nation that acts manfully and justly should ever have cause to fear us, and no strong power should ever be able to single us out as a subject for insolent aggression.

    Our relations with the other powers of the world are important; but still more important are our relations among ourselves. Such growth in wealth, in population, and in power as this nation has seen during the century and a quarter of its national life is inevitably accompanied by a like growth in the problems which are ever before every nation that rises to greatness. Power invariably means both responsibility and danger. Our forefathers faced certain perils which we have outgrown. We now face other perils, the very existence of which it was impossible that they should foresee. Modern life is both complex and intense, and the tremendous changes wrought by the extraordinary industrial development of the last half century are felt in every fiber of our social and political being. Never before have men tried so vast and formidable an experiment as that of administering the affairs of a continent under the forms of a Democratic republic. The conditions which have told for our marvelous material well-being, which have developed to a very high degree our energy, self-reliance, and individual initiative, have also brought the care and anxiety inseparable from the accumulation of great wealth in industrial centers. Upon the success of our experiment much depends, not only as regards our own welfare, but as regards the welfare of mankind. If we fail, the cause of free self-government throughout the world will rock to its foundations, and therefore our responsibility is heavy, to ourselves, to the world as it is to-day, and to the generations yet unborn. There is no good reason why we should fear the future, but there is every reason why we should face it seriously, neither hiding from ourselves the gravity of the problems before us nor fearing to approach these problems with the unbending, unflinching purpose to solve them aright.

    Yet, after all, though the problems are new, though the tasks set before us differ from the tasks set before our fathers who founded and preserved this Republic, the spirit in which these tasks must be undertaken and these problems faced, if our duty is to be well done, remains essentially unchanged. We know that self-government is difficult. We know that no people needs such high traits of character as that people which seeks to govern its affairs aright through the freely expressed will of the freemen who compose it. But we have faith that we shall not prove false to the memories of the men of the mighty past. They did their work, they left us the splendid heritage we now enjoy. We in our turn have an assured confidence that we shall be able to leave this heritage unwasted and enlarged to our children and our children’s children. To do so we must show, not merely in great crises, but in the everyday affairs of life, the qualities of practical intelligence, of courage, of hardihood, and endurance, and above all the power of devotion to a lofty ideal, which made great the men who founded this Republic in the days of Washington, which made great the men who preserved this Republic in the days of Abraham Lincoln.”

    And in this from TR’s ‘The City in Modern Life’ (1895)

    “The great towns are making themselves over, and providing themselves with all the appointments of a new civilization, because their permanent existence is now accepted as a fact. Energetic and intelligent action has already been taken here and there to render city life more tolerable for the bulk of city people, and such action must be copied everywhere.”

    Two important parts of this ‘new’ American culture are community or public services (water, fire protection, electricity, police protection, health care, public libraries, ending use of public money for religious institutions, etc.) and public regulation, sometimes even direct control of economic activities with the intent to serve the needs of the ‘public good’ first and private property and profit second (or sometimes not at all). Along with a tax and legal structure to assist these ends, including oversight of all local public services through national standards supervised by the national government. Later would be added regulation of most important parts of everyday life (drug and food safety, public schools, health care safety and effectiveness, environmental safety, etc.). From the beginning these public services and regulation also ensured members of the public and those working in the agencies direct access for input both to regulations and the administration of the agencies.

    The shape of these new public services, regulations, and standards very much reflected the history of American culture. That is, they were focused on individual rights, optimism, and respect for neighbors. By the 1960s some of the agencies had become understaffed, underfunded, and overworked. Many lost focus and some even became quite authoritarian. Most of the efforts to fix these problems have thus far failed. Mostly because the assumptions, both moral and political upon which they are based had lost touch with the origins of the ‘new’ American culture that TR championed. Some were even in direct opposition to this culture. After a dismal period from the 1980s till today, it seems now the US may be getting back to that culture.

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