Date: 2024-09-27 Page is: DBtxt003.php txt00021470
US ECONOMY - FINANCIALIZATION
FINANCIAL DEBT
An essential driver of the fiction of wealth creation under financialization
FINANCIAL DEBT
An essential driver of the fiction of wealth creation under financialization
Burgess COMMENTARY
This graphic shows that the enormous growth in financial debt during the past several (say 5) decades from the 1970s to the present time. The growth of debt is one of the ways in which a modern economy is able to function and appear to be growing and being successful using the prevailing metrics for economic performance.
In some ways debt is pure fiction with no tangible reality. It is a promise that may or may not have any substance. Growing debt makes it possible for the debtor to have the use of assets without actually having the wherewithal to own the assets free and clear. There is an appearance of good living that is only half the story. The creation of a debt may enable a building to be built, or a machine to be purchased, or a student go to college. The creation of a debt may be a 'good' thing ... but not always.
The creation of a debt my be nothing more than a 'book entry' or it may actually require the use of tangible money or a real economic asset.
This is where financial engineering starts to be a driver of decisions, which may or may not support the sort of valueadd that is positive for society, the environment and the economy.
The legal framing of a debt may give the semblance of substance ... but the reality of substance depends on factors beyond the legal paperwork. state of household finance was worse in May 2019 than it was in the runup to the financial crisis of 2008.
This graphic also shows the catastrophic damage done to household balance sheets since the 1970s. In the 1970s the world economy was stressed by the OPEC oil shock of 1973 which made the US especially uncompetitive because of its previous reliance on very cheap energy. Reagan era policies set the stage for much tougher limits on labor and collective bargaining as well as financial deregulation which facilitated the creation of more and more consumer credit. The growth of consumer credit made it possible for consumer demand to remain strong even while wages were weak. Reagan era banking deregulation unleashed the greed of bankers which resulted in the Savings and Loan Crisis and other abuses.
Peter Burgess