We can’t save the economy unless we fix our debt addiction
Our economy has increasingly been financialized, and the result is a sluggish economy with stagnant wages. We need to decide whether to stop the cycle and save the economy at large or to stay in thrall to our banks and bondholders. Without clearing our debt, the economy will continue to languish in debt deflation and polarization between creditors and debtors.
As a statistical measure, financialization is the degree to which debt accounts for a rising proportion of income or the value of an asset, such as a company or piece of property. The ratio tends to rise until defaults lead to a crisis that wipes out the debt, converts it into equity or transfers assets from defaulting debtors to creditors.
As an economic process, financialization makes money through debt leverage — taking on debt to pay for things that will increase income or the value of assets: for instance, taking out a loan for education or a mortgage on a property to open a store. But instead of using credit to finance tangible industrial investment that expands production, banks have been lending to those who want to buy property already in place — mainly real estate, stocks and bonds already issued — and to corporate raiders — those who buy companies with high-interest bonds. The effect often leaves a bankrupt shell of a company, or at least enables corporate raiders to threaten employees with bankruptcy that would wipe out their pension funds or employee stock ownership plans if they do not agree to replace defined benefit pensions with riskier contribution schemes.continue reading »