16.4 The “Fin” problem

At the beginning of the capitalism the capital is scarce,there is less capital than total real economy´s output(production of all goods and services) and so its velocity in the economy is high. As the time progresses, profits accumulated and not spent are causing higher and higher level of capital accumulation. Its velocity decreases, cost goes down but it is still asking for yield. Real economy is growing through technological innovation, new energy resources, population growth and resulting growth in total transactions between its participants. That growth is limited by available energy and food limits and is rather linear. However, capital growth is exponential, given its compounded interest nature. This difference in growth character gives after some time (decades) birth to a phenomenon I call the „Fin“ (the area of capital above real economy resembles a shark´s fin and it also matches with financial-moral aspect of such nonproductive economy).

The „Fin problem“ is such that accumulated capital, even its volume has already outsized the scope of real economy is still demanding some income.

This situation was already partially predicted by John Maynard Keynes in his work The General Theory of Employment, Interest and Money where in chapter Chapter 24. Concluding Notes on the Social Philosophy... he writes:

“I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.”

 JMK predicted that by continuous increases of capital in the economy its price will go down until it becomes widely available at very little cost to potential entrepreneurs. The process he calls „euthanasia of the rentier“ should be gradual and result in significant reduction of interest as price of capital. We can see it happening, as dividend yields are going down and also bank interest paid to depositors is ever lower. But the „euthanasia of the rentier” is not happening without significant side effects.  Increases in capital causing its price to go down are simply causing more capital to be there – the „Fin“, which still requires some interest. Quantitative easing processes done by central banks are just increasing the Fin´s height as there is still some interest required by investors.

Imaging your bank would told you that from now you are not going to get any interest at all, as there is already too much capital in the economic system. What would your reaction be ? I dare to say that not very distinguished one at minimum. And the consequence would be obvious – your withdrawal of funds from such bank whose executives are paying themselves multimilion bonuses and cheekely refusing to pay you your interest babbling something about economy´s problems.

So the rentier aspect of capitalism is still there, but just amplified in its size as quantitative easing as necessary means to provide additional buying power into the economy is applied from time to time. Why the quantitative easing ( as supply side stimulus) was explained in the first chapters dealing with missing additional resources needed for sustainable profit creation.

If there would be no quantitative easing, the excessive capital would be still asking its price and deriving it from real economy – the Capital drag of resources described by red arrows. That would be causing the real economy to suffer through deflation spiral. The money is simply not growing on the trees – they must come from somwhere and that second somewhere is obviously the Quantitative easing method. (which always comes at the end after exhaustion of debt option, when nobody is willing to lend to the government any more).

The „gradual euthanasia of the rentier” is simply too gradual and without a definitely set time frame from where there would be no interest or yield at all the “Fin” is just growing and growing. And of course, it is still asking its share of new capital food. Even marginal additions are substantial now as the Fin is above the Real economy. The exponential growth of capital is simply far too fast for real economy to keep the pace.

As drug addict, without new, higher and higher dosages of QE it cannot survive and quickly goes into excruciating pains of withdrawal symptoms of recession and deflation.

The QE cannot go forever, as the method itself is causing the problem to just grow even more. What eventually happens is that inflation starts settling in and lifting the curve of real economy above the curve of capital thus reducing the fin:

The inflation lowers the nominal amount of excessive capital over real economy size and so the need for QE is radically diminished. The capital can derive its profits from real economy with little help of state debt as before and the cycle repeats again. The urgency of the problem is partially solved, but at the costs of significant inflation which might disrupt the whole economy and its containment represent further serious risk. If it is not successful, it can develop into hyperinflation and destroy the whole state with unthinkable consequences.

The quide to success here is to monitor the Fin developing and apply inflation rather sooner than later, when it is indeed too late. But current central bank policies aimed at keeping the inflation at bay are doing exactly the opposite. So the fin is growing and QE is the game of the day. It is not that difficult to understand why, inflation is not welcome phenomenon and so central bank mandates are mostly designed to contain it. The only other way of dealing with the fin problem is to cut it down with direct capital taxation, as described in chapter Periodic taxation of accumulated capital.

By „haircutting“ the fin the capital drag on real economy decreases and real economy is not negatively affected to the extent it was before. Amount of capital in the system again resembles its meaningful volume, reflecting production capacity of goods and services economy is able to deliver.

The haircut of capital is preventing inflation pressures and restores shorth term equilibrium, which neeeds to be monitored and again adjusted in the future(through further haircuts) as accumulation still continues. This is the unavoidable cycle which will exist as long as there will be need for profits and these profits will not be consumed in full.