This post The Toxic Fruit of Financialization: Risk Is for Those at the Bottom appeared first on Daily Reckoning.
Financialization of the economy substitutes expansion of interest, leverage and speculation for real-world expansion of goods, services and wages.
Financial “wealth” created by leveraging more debt on a base of real-world collateral that doesn’t actually produce more goods and services flows to the top of the wealth-power pyramid, driving the soaring wealth-income inequality we see everywhere in the global economy.
As this phantom wealth pours into assets such as stocks, bonds and real estate, it has pushed the value of these assets into the stratosphere, out of reach of the bottom 95% whose incomes have stagnated for the past 16 years.
Moreover, higher debt loads and higher interest payments of financialization inhibits people at the bottom of the wealth-power pyramid from taking risks such as starting a small business.
The core problem with financialization is that it requires ever more extreme policies to keep it going. These policies are mutually reinforcing, meaning that the total impact becomes geometric rather than linear.
Put another way, the fragility and instability generated by each new policy extreme reinforces the negative consequences of previous policies.
These extremes don’t just pile up like bricks — they fuel a parabolic rise in systemic leverage, debt, speculation, fragility, distortion and instability.
This mutually reinforcing, geometric rise in systemic fragility that is the unavoidable output of financialization is poorly understood, not just by laypeople but by the financial punditry and professional economists.
One of the worst consequences of financialization is the shifting of risk from the top of the wealth-power pyramid to the bottom. Those who benefit the most from financialization’s leveraged, speculative credit bubbles protect themselves from losses, while those at the bottom of the pyramid (the bottom 99.5%) face the full fury of financialization’s formidable risk.
The asymmetry of risk and exposure to loss resulting from financialization is about to become consequential.
Financialization has reached the top of the S-curve and is now in the decline phase. As noted on this graph, what worked so effortlessly in the boost phase of financialization not only no longer works, it actively boosts the risks of sudden, catastrophic losses.
Those who have pushed the risk down the wealth-power pyramid are confident the Federal Reserve will continue to limit the risks of speculative financialization. The S-curve is a pattern of Nature. If you’re confident the Fed is now the ultimate power in the Universe, then you’re betting that the Fed and Treasury will always absorb all the risk and all the losses, with zero consequences.
The S-Curve suggests that bet isn’t as low-risk as those at the top of the wealth-power pyramid currently believe.
And financialization is in a death spiral.
Each “fix” that boosts leverage and debt fuels a speculative boom that then fizzles when the distortions introduced by financialization destabilize the real economy’s credit-business cycle. And each new policy destroys another level of prudent fiscal/financial discipline…
The discipline of sound money? Gone.
The discipline of limited leverage? Gone.
The discipline of …read more
Source:: Daily Reckoning feed
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