Financialization and inequality
Financial speculation sure is an easy way to make money.
Also: How was American capitalism to keep thriving after the manufacturing sector had shrunk (moved off-shore to take advantage of cheap labor abroad)?
Answer: Between 1950 and 2020 the FIRE (finance, insurance, real estate) sector increased from 10% of the economy (GDP) to 20%:
But the world of big Finance is a big Ponzi scheme.
It’s a big Ponzi scheme upon which the whole economy now depends. Hence the idea of “Too Big to Fail.” Failures of large banks, insurance and financial services companies, pension funds, etc. are anathema to the monetary authorities. Hence excesses of monetary stimulation and artificially low interest rates.
As financialization accelerated, during the 1990s we started hearing about the “underfundment” problem: Concerns about the capability of institutions to meet future obligations and/or to make debt payments … sovereign debt from governments running deficits; corporate debt from over-expansion, leveraged buyouts, etc. And, sure enough, these problems led to two financial crises in quick succession (2001–2002 and 2007–2008). Faith in the system was shaken.
The solution was to have the monetary authorities flood the world of finance with liquidity. What was done under the rubric of “Quantitative Easing” (QE) between 2009 and 2021 was unprecedented: money pouring into bank coffers; government subsidies to shaky business goliaths; interest rates at zero! And so the pension funds were made flush; the balance sheets of the largest banks were buoyed; the insurance companies were bailed out; and the overall economic metrics looked healthy enough.
Issue: The richest 10% of the population owns more than 80% of financial assets. Flush? They became super-rich. Prices of luxury items soared. That doesn’t affect the average person, but eventually the general Consumer Price Index started to creep up; and real estate started to become increasingly unaffordable for modest income earners:
https://mishtalk.com/economics/the-starter-home-is-no-more-even-in-second-tier-markets/
What will happen to the Ponzi scheme if the Fed has hit a QE limit? What will happen to the social order if the masses are fed up?
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Longer View:
Faith in the system had been shaken during the 1930s. And before Communism failed (circa 1970–1990) there was an idea that there was a competing system that might prove attractive to the masses. So, under the guise of Keynesianism, governments and monetary authorities became much more proactive, moving increasingly toward managed capitalism. With apparent success re: the tonics of deficit spending, currency manipulation, liquidity injection, and interest rate modulation.
Libertarians criticized all that intervention: “Let the free market work. Over-management will lead to pricing distortions and economic inefficiency.” But the monetary authorities got increasingly bold, owing to all the kudos they received about averting crises. Recently: taming the inflation of the 1970s, mitigating Y2K, recovering from the Tech Bubble, avoiding a plunge into depression after the Great Financial Crisis.
The averting of crises via the artificial buoying of asset prices may in hindsight be recognized as kicking the can down the road. The Libertarians might be proved right in respect to pricing distortions. The prices of financial assets have gone so high that the assets now figure to produce very low returns going forward. And real estate prices have simply gone too high relative to incomes. The long era of successful stimulation and manipulation might be coming to an end. What’s next? My guess is that we’ll see oscillations of inflation, deflation … and social unrest.
