What if the Financial System Collapsed? A Thought Experiment …


This isn’t an attempt at fear mongering or some #tinfoil prediction, since I don’t think the financial system will fall apart, at least not in the near term.  Or more accurately, if it does, governments will do anything at all, however stupid, to prop it back up.  And given how terrifying the notion that it even could happen is to most people, they’ll get public support for the most part in whatever idiocy they involve themselves in.

Instead of looking at the more realistic scenarios, though, I thought it would be more interesting to look at what might actually happen if, rather than desperately trying to prop up a system that has threatened to collapse at least once a decade since the 1970s, governments simply let it collapse. 

The fear, of course, has a reasonable basis.  The financial system is the means by which we exchange.  Without exchange we have serious problems (even more serious than we have now).  Everything is based on exchange in one way or another.  Life itself, as metabolism, is after all a type of exchange.  The fallacy is that exchange is dependent on the financial system, the particular one we have, or any in general.  The fetishism of Capitalism is that the profit-motive is the only or the primary motive for exchange, when in reality people exchange things, labour, etc., for any number of different reasons,  nearly as numerous perhaps as exchanges themselves. 

Bur what, in fact, would be likely in the event of a total collapse of the world’s financial system, which could perhaps occur if governments were either unable to stop the collapse due to its sheer size, or simply became tired of taking orders from bankers and decided to let the source of their power self-destruct?

Firstly, there would be a huge amount of confusion.  There is so little cash in today’s society that if the systems that allow us to pay and be paid by bank cards, direct deposit etc. simply didn’t function, we could not simply use cash.  And that cash, in any case, is only guaranteed by the same system.  People could of course barter locally, but that hardly solves much in a society dependent on global trade.  And the assumption would be that the collapse is very temporary, an assumption governments and corporations would be unlikely to want to damage initially. 

How easily could a new system be set up though?  The current system has grown, somewhat organically, from beginnings in the Renaissance through the Bank of England (and the Empire that propagated the system) to the almost autonomous and hugely complex system we have.  Almost autonomous, because it cannot actually create the value which its accounting is supposed to measure. 

Setting up a new system, if this one failed, would be a monstrous undertaking that would require the agreement of most of the world’s governments, the IMF, a number of the most powerful global corporations and the public, or at least that part of the public with a say (precisely who that would be, since those with the most say currently would have nothing to base any power on, is difficult to determine).  Needless to say all of these have conflicting interests, conflicts that currently are sorted precisely through the system, but without said system they would have to be dealt with directly.  It’s not difficult to see that any type of necessary consensus might be impossible to achieve. 

So, situationally, we would have no system, together with a common assumption that the situation is going to be a short lived thing.   Based on that assumption, and in order to assuage the anxiety brought on by the confusion, most people would continue to do what they were in fact doing prior to the collapse.  Large commercial traders would have to keep trading, and given that there would be no way to determine what credit worthiness might look like once a new system is started, the only feasible method would be to deliver in return for some sort of promissory.  Similarly wages would have to be paid via some sort of promissory, but there would be no way to measure such promissories against one another, no way to reconcile the balance.  How long could this go on?  Indefinitely, in fact.  As a small scale example, consider no-fault insurance.  Rather than constantly paying one another, insurance companies in Canada simply ignore fault on a day to day operations basis, tallying up the net transfers between them on a yearly basis.  Would they go out of business without the yearly tallying?  There’s no reason to believe so.  Similarly, companies today would go out of business without bank financing, because they have to pay salaries and external costs of doing business, and then tally it up later with sales, but if those costs were promissories, there’s no reason to believe they would have any need of bank financing for daily operations. 

The obvious (and in some countries huge) exception is those who work in or whose income is based off the financial system itself.  This includes not only those in the finance and insurance industries, but all of the wealthy.  The country most devastated in this sense would be the U.S., where nearly 70% of workers work in finance and insurance, and the majority of the world’s wealthiest individuals and families have their wealth managed.  For the latter, they simply would no longer have anything other than direct property, and to the degree that direct property requires protection, no way to protect that either.  And they would have to deal with close to 80% of the population being unemployed and likely none too thrilled with them.  Without the financial system, the small number of the truly wealthy would be irrelevant if they survived at all. Since they would no longer be wealthy, they would just be a few extra unskilled welfare cases.

Those in finance will bring up the fact that without the capital accumulation of the wealthy, there will be no investment in new technologies, in infrastructure, etc.  In response I would just note that technology itself has lowered the cost of innovation to next to nothing, and most infrastructure is created by public agencies, not private wealth, so I’m not convinced it would matter all that much. 

So then here is the question the thought experiment leads me to:  what if the financial system collapsed and nothing significant happened?

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