Three Decades of Financial Engineering by Central Bankers Have Yielded “Age of Financialization”

By
Dylan Grice

At the Sixth Annual CFA Institute European Investment Conference in London, Dylan Grice, director of research at Edelweiss Holdings, delivered a sober assessment of the state of the economy after three decades of financial engineering by central bankers around the globe. Grice’s periodic thought pieces are both widely read and quoted, and his most recent essay, titled “The Language of Inflation” (PDF), carried a message similar to the one that Grice delivered at the conference: While the US Consumer Price Index (CPI) and other government-generated inflation measures indicate that price inflation has been tamed, central bankers have created inflation of a different sort — credit inflation — which has devalued money and ushered in an “age of financialization” that has contributed to a devaluation of language.

Grice cited Bernd Widdig, author of Culture and Inflation in Weimar Germanywho wrote, “Next to language, money is the most important medium through which modern societies communicate.” Using Google’s Ngram Viewer, which charts word usage in books published since 1600, Grice demonstrated how words like “leveraged” and phrases like “right now” have spiked since the 1980s and are emblematic of how society has come to devalue patience and thrift.

As further evidence, Grice showed how the word “saving” peaked in usage a century ago and was overtaken by “spending” in the 1960s. “Saving has gone out of fashion,” Grice told attendees, “and that has consequences.”

Similarly, a parabolic upswing in the usage of “grow the business” and “EPS growth” implies a fixation on short-termism and underscores our investment culture’s obsession with growth. And while Grice acknowledged that growth is indeed a noble goal, he bemoaned the fact that it has become a goal unto itself — a recipe for bad decision-making — rather than the result of sound strategy and execution.

Grice argued that there have been social costs resulting from the devaluation of money and the associated devaluation of trust. Money is not just a unit of exchange or a store of value, he noted; it also has embedded within it an unmeasurable but critically important element of trust. Grice noted that it has been the rich — those “closest to the money fountain” — who have benefited the most from the explosion of credit brought on by quantitative easing. This has widened the gap between wealthy and poor to levels not seen since the Great Depression.

The result, regrettably, has been policymakers “play[ing] more games with money.”

Grice doesn’t think central bankers will chart a different course going forward. “[Janet] Yellen is going to make Bernanke look like Volcker,” he joked, referring to the former US Federal Reserve Chairman who tamed inflation in the 1980s.

The 2015 CFA Institute European Investment Conference will be held in London on 26–27 November. Registration is now open for the event, and speakers include Dan Ariely, Anne Richards, Tim Harford and Michala Marcussen, CFA, offering valuable insights on the region’s most pressing economic developments alongside sought-after technical workshops.

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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One Response to Three Decades of Financial Engineering by Central Bankers Have Yielded “Age of Financialization”

  1. Irsan Bratadjaya says:

    Thank you

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