The genie is indeed out of the bottle; and the point when it became clear to me that it’s an evil rather than a benevolent genie was when the captains of the securities industry stood before a Congressional Committee and had the temerity to announce that their industry was the “backbone of the American economy.”

Once upon a time, a broker was a facilitator and nothing more. He was someone who was in a position to bring a willing buyer and a willing seller together and help them effect a trade. At that time, bringing investment money to enterprises in need of capital was constructive and deserving of the label of, if not the “backbone of the economy,” certainly its enabler.

Even after 1792 when those 24 brokers, meeting under the buttonwood tree at the foot of Wall Street, formed the New York Stock Exchange, the ability to assist investors desirous of owning shares in one or another company could be considered a wholesome service—but not for very long. Realizing that they could make more money from investors than from investments, the securities industry pioneers guided their industry down a path that took it from constructive investment to gambling, from earning money with one’s money to seeking something for nothing.

Financial innovation has been a characteristic of that industry; and, as the years have passed, the public has been duped into thinking that trading—short term speculation on the movement of the market itself—was actually investing, deserving of the same respect as the part-ownership of thriving businesses.

The genie’s name is Credit. At first reserved for fiscally responsible purposes—collateralized leverage that could produce revenue and income more rapidly than could resources limited to what existing assets could afford, financial innovation carried credit beyond its constructive business use and found justification in encouraging home ownership, collateralized to be sure, but by a home, an asset of substance but one which produced no income.

Eventually, such innovation carried it beyond the point where it was used solely for business and major purchases of valuable assets to the point where, today, credit is used for expendables and to satisfy the self-destructive trend toward converting luxuries into necessities: now the overheating engine of our economy. Like a Ponzi scheme, our society’s misuse of credit has an ultimate dead end. Credit is simply an obligation that extends into the future. And the future is not infinite! As it is, we have already mortgaged our own futures and those of our offspring; and we are well into committing the lives of our grandchildren to satisfy our own cravings for material things to which we are not entitled by virtue of our own productivity.

So, like the Ponzi scheme or chain letter, the trend must end. And just how chaotic and traumatic that end will be depends, unfortunately, upon the courage and intelligence of our elected representatives.

Ellis Investment Concepts