Introduction

Virtual reality and a gilded age

MID-TOWN MANHATTAN, about where the Rockefeller Plaza spills on to Fifth Avenue, is arguably where a Venn diagram of the circles of global money, sex and power would overlap. The footpaths are crowded with people from every corner of the world, drawn like iron filings to a magnet, their wallets stuffed with credit cards, ogling shop windows and scanning the copycat goods of street vendors.

It is an alluring, exciting destination: so much stuff, so many people, such confidence and swaggering possibility – the product of the best the world can produce, sell, copy and buy.

‘I don't get it,' my companion said as we pushed through the crowds on a lovely Spring day in 2007. ‘I don't understand the economy any more. Where does all the money come from? They are all buying, but what does anyone, except the Chinese, actually make?'

My companion grew up in Britain's industrial north and became a celebrated writer, in part because of the way he captured the gritty hand-to-mouth reality of working-class life in the mining villages and factory towns of his childhood. Several decades on, he listened to his daughter and her friends debating the merits of that week's must-have item from Topshop. ‘How many bags does any girl need?' he wondered aloud as we strolled past the gaggles of excited young women considering their options.

It was a scene that could be repeated – albeit with slightly less intensity – at the heart of every city in the world.

The Rockefeller Center was built seven decades ago in an act of visionary indulgence as the world slipped into the Great Depression, but in the gilded age of the early twenty-first century, it acquired a new lustre. Until recently, almost everyone had access to seemingly endless credit, based on the magic of house prices that doubled in a decade, and they celebrated by spending. Consuming was about more than stuff; it was loaded with meaning – a symbol of belonging, wealth, flair, allure, success, even invincibility. As the subversive t-shirt popular in certain circles when this cycle began in the 1980s whispered: ‘Whoever has the most stuff when they die, wins.'

 

FOR THOSE who learnt their intuitive understanding of economics in an earlier age, when making money was inextricably tied to making things, the contemporary economy is as mysterious as God.

There are some fundamentals that still make sense to the untrained observer: it is easy to understand the transaction involved in having a hundred and fifty million tonnes of coal – or its equivalent in gas, bauxite, gold or silica – a year out of the ground in Central Queensland, freighting it to the coast and shipping it to China; or why money changes hands for the sale of services from education to investment advice. The wealth of the heirs of those who invented the countless essentials of contemporary life – credit cards, toothpaste tubes, tetrapaks, and microsoftware – who are rewarded every single time they are used, is easy to comprehend, even if the numbers are mind-boggling.

But in the gilded age of the early twenty-first century, dollars no longer seemed to match the exchange – it was even more mysterious than Jay Gatsby's ill-gotten wealth. A century after F. Scott Fitzgerald described what happened in a world where everyone was ‘moving East to work in bonds', investment banking pulled many of the best and brightest to global hubs and offered rewards that dwarfed even the excess of The Great Gatsby.

In the new world of global finance, the same principles applied: someone invented something and built a market for it, then at each point in the transaction chain someone else took a cut – a cent here, a dollar there, a percentage there, each little amount multiplied over and over.

The problem – as became abundantly clear on ‘meltdown Monday' on September 15, 2008 when Lehman Bros collapsed and Merrill Lynch became a division of the Bank of America – is that rewards had been decoupled from product. Even the most senior managers of the world's most prestigious investment houses no longer knew what they were selling. Economic commentators on global news channels chorused: ‘The degree of complexity is so great, the products so new and untested and the operations are global. A huge number of directors didn't understand what their companies were up to.'

This was an economy made possible by the vast computing power of the virtual age. As recently as a decade ago, researchers recalled bond traders at the giant investment banks would still ‘use over-sized calculators at their desks to figure out yields down to two decimal points'. Now they draw on vast databases that dice and slice the potential returns by factors in hundreds of fields. ‘As you build more complex products, you get further away from real world events, like actually having to sell these bonds,' the head of Moody's commented.

Even the name of the product that brought the banks down was fittingly ironic – collateralised debt options. In a post-modern world, it was hardly surprising that the collateral was sadly missing. Like a giant game of pass the parcel, after the final wrappers had been removed, the world's investors and the US Treasury were left holding what looked suspiciously like a big box of nothing.

 

UNEASE ABOUT THE nature of the global economy has been nagging for years – the perplexed response of my companion on Fifth Avenue was not unique. Even the jostling shoppers seem to realise this, in their frantic scurry to buy stuff to give substance to their feelings of well-being.

Robert Reich has pointed to the tension at the heart of the prevailing economic model in his recent book,Supercapitalism (Scribe, 2008): investors want the best return, consumers want the lowest prices – sooner or later something had to give.

While the ‘something' that gave was people in far distant countries, whose contribution to the standard of living in the West was essential but invisible, it was easier to ignore.

Now it has come home, especially in the United States. The gap between the sexy glamour of those at the peak of the gilded age and the reality of falling incomes for a large proportion of Americans bit hard this year, as those flattered into accepting unsustainable credit confronted the bitter reality of having to pay it back.

Investment guru George Soros has demonstrated, and argues in his recent book, The new paradigm for financial markets (Scribe, 2008), that most people believe what they want to see and act accordingly. So when the envelope offering yet another credit card arrived, the temptation to say yes was irresistible, even if their incomes were not rising at the same rate.

There are many reasons Soros was so extraordinarily successful; he attributes it to his capacity to apply psychological insights to investment decisions. This demands uncommon intellectual discipline, an approach that escapes most people inclined to believe the positive spin.

Soros argues there is a need for a new financial system. ‘Not only has the prevailing paradigm – equilibrium theory and its political derivative, market fundamentalism – proven itself incapable of explaining the current state of affairs, it can be held responsible for landing us in the mess we are in.'

We were all susceptible to the dream of the gilded age. The tarnish on the fantasy has now corroded the underlying reality. It is scarcely surprising that consumer spending stalled in one country after another even before lines of credit dried up. Soros notes that it took those at the centre of the gilded age a long time to realise this: ‘Both the financial markets and the financial authorities have been very slow to recognise that the real economy should be affected ... The real economy was stimulated by credit expansion. Why should it not be affected by credit contraction?' He argues that the misconceptions at the heart of the system manifested themselves ‘not only in the failure to understand what was going on; they have given rise to the excesses which are at the root of the current market turmoil'.

The rising tide of books trying to make sense of it all, and proposing a new basis for the global economy, is likely to develop into a tsunami before the new Keynes of the global economy, with an analysis that makes sense of the even more complex, fast and interrelated world of the twenty-first century, is found.

IN RECENT DECADES, we have become accustomed to life happening in a virtual space, removed from the tangibility that once helped make sense of things. It is a world of smoke and mirrors, of spin and lies, where what is real and what is not is increasingly hard to distinguish.

Those who control the virtual space, who can make a fortune out of selling something that only exists in the ether, who can convincingly spin a story that makes sense and seems plausible, have a certain power. But real power is hard edged and can be tested and exercised, often with brutal consequences.

At some level, there is a battle between those who believe in the best of human nature, and those convinced that the worst will prevail.

It is scarcely surprising that it is the counter-tales, the stories of human failure rather than success, that have such resonance. The stories of politicians so bewitched by their power that they come to believe different rules apply to them until they get caught with their pants down and a credit card trail of inappropriate behaviour; the captains of industry convinced that their brains and wealth have really turned them into invincible masters of the universe until their fortunes slip through their fingers as share prices plummet; the fantasists who watch children being sexually abused and call it entertainment, and are surprised when they are arrested, charged, jailed and subjected to vociferous public outrage.

There is a disconnection between power and reality. As the Wall Street crisis of 2008 has shown, most people have very little power beyond their immediate circumstances. It is scarcely surprising that public sentiment is most animated when it is able to focus on the tangible – when it can name the guilty man, the greedy scammer, the overpaid banker, the sexual predator, the grog-runner.

Or forget about all that, retreat to an imagined virtual world, or just go shopping and hope the credit card bill never arrives

September 20, 2008

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