Economics Without The B.S.**:
[** Double entendre intended.]
There was a time when wealth accumulation – net asset value – was tied to our nation’s productivity – the things we made or services we provided. That was true after WWII and through the 1960s. But things changed after that.
The inflationary ‘70s coupled with the currency challenges to the Dollar System from the Deutsche Mark and Japanese Yen in the 1970s and 1980s, which was trying to enforce discipline on the international market system and capital markets, and establish some type of stability to markets so commerce could flourish, would have the effect of instituting economic and financial policies which would moderate economic growth in the advanced economies while promoting investment in the less developed world.
These policies developed as communism was collapsing in Europe in the 1990s and private wealth pools were arising that could challenge the monetary policy of the G-5/G-7 central banks and had great opportunities for profit in a world where investment was just about boundless. When globalization policies were formed in the mid-1990s it encouraged the free flow of capital internationally.
The disparity in incomes and wealth (net assets equals assets minus liabilities) is due to the change in economic policies that place a greater emphasis on asset appreciation rather than productivity, productivity being the income derived from making things or providing a service. This change becomes evident after the 1980s, where wealth is starting to outpace nominal GDP, and becomes very apparent by the 2000s, which is coincident with the rise of globalization.
And just frankly, the wealthy are in a better position to take advantage of the free flow of capital that was concomitant with the rise of globalization by the mid-1990s. The wealthy have more assets, are better diversified, and in a better position to use advisors. We are in a world awash with wealth; but it is concentrated in a few small hands.
In 2008 the value of credit default swaps (CDS) stood at $45 trillion compared to $22 trillion invested in the stock market, $7.1 trillion in mortgages and $4.4 trillion in U.S. Treasuries. By mid-2010, after the reorganization of the financial markets, the value of outstanding CDS was $26.3 trillion.
The excesses of the financial system which came out of Wall Street and were reported by the Financial Crisis Inquiry Commission for the 2008 diabolical collapse noted that the derivative market had a notional value (the value of the transactions for the underlying assets, not the market value of the assets) of around $600 trillion.
Much of this derivative activity was tied to the mortgage market in the United States and involved a variety of derivatives to set up the positions. What was the total value of the actual mortgage market in the U.S.? Considerably less than $20 trillion. McKinsey reported that the total world’s financial assets – includes stocks, bonds, bank deposits, and real estate – totaled $167 trillion. So, why a $600 trillion casino for the wealthy playground?
This is all to summarize and give indication for the amount of wealth in the world, where and how it is deployed, and for what purpose. It is no wonder we have inequality in the world. I find it amazing when I read an editorial or academic paper that is to the contrary. And the unfairness of the system. And the public and political backlash. And what can we say about the furtherance of democratic governance internationally and right here at home? What public interest is being served with this playground?
