Lately I've been reading Eduardo Galeano's book, Open Veins Of Latin America. The early portion of the book discusses what happened to Spain in the 16th century following its conquest of Latin America. The Spanish created mines and drained the area of its gold and silver, so receiving a huge infusion of unearned money.
One might suspect that this windfall turned Spain into an economic powerhouse. But some funny things happened when the easy money arrived. The Spanish king proceeded to spend a huge amount of the nation's reserves on wars against the 'enemies of Christianity'.
The nobility and upper-classes poured vast sums into new estates, palatial homes, and luxury goods imported from other countries. Many in the lower classes, attempting to emulate the gilded, ostentatious lifestyle of those above them, abandoned productive jobs and rushed into speculative pursuits.
Little of the new money was invested in domestic industries, and tariffs were dropped to meet consumer demand. In the end the new money flowed out of Spain, the local industries crumbled, and the nation ended up bankrupt.
Sound familiar? Replace the words 'gold' and 'silver' with 'credit' and 'leverage' and you have a pretty accurate description of the United States over the last decade. And, to a lesser extent, of other 'advanced' nations like England.
The parallel experiences of 16th century Spain and of the United States and England 500 years later suggest that it is perilous for a nation to put the interests of finance and speculation over real investment and production. In a global economy, the peril extends to the other nations it conducts business with, which is pretty well the whole world.
The parallel also suggests there's a big difference between creating wealth (as real industries do) and making money (as stock market players and bubble speculators do). You can make a ton of money and not create any wealth. Making $100,000 flipping a house or trading stocks creates the same amount of real wealth for a country — zero.
So what could nations do to get real investment in real industries flowing again?
An enticing idea, floating around for some time, has not received the attention it deserves. The idea is simple and straightforward: it would place a small transaction tax of one penny on every stock market trade and use the proceeds to invest in real industries that create real wealth.
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