The Changing World of Work 2: Financialization = Insecurity

Promises of wealth and security are far more contingent than is being advertised.

The Millennial Generation, if we’re to believe various polls, aspires to either make boatloads of money on Wall Street, or secure a can’t-be-fired job in the government. Given the dominance of finance and an economic backdrop of rising insecurity, these are rational choices.

But all those Millennials hoping to work for Goldman Sachs does raise a question:when did playing financial games become so much more profitable than producing goods and services?

And that raises another question: is the dominance of the FIRE sectors (finance, insurance, real estate) permanent or cyclical?

Let’s turn to some charts for answers. The first is a look at the finance and insurance sectors’ share of the gross domestic product (GDP). The sectors’s share reached 4% of GDP in the stock market bubble of 1929 and the echo bubble in the mid-1930s.

It took 40 years for finance and insurance to exceed the highs of the Roaring 20s bubble.

In the 40 years since the early 1970s, finance and insurance have doubled their share of the GDP. Note that since GDP has expanded many times over since 1935, the nominal size of financial services has soared.

Next, let’s look at productivity–the engine of all wealth creation–at least in an economy that incentivizes producing goods and services.

It turns out productivity growth collapsed after the oil shock of the early 1970s. But as I note on the chart, it wasn’t just the oil shock: the low-hanging fruit of productivity gains generated by mechanization and new technologies had been picked, and the satiation of basic consumer demands led to a post-industrial economy focused more on the profits to be reaped by extending credit so consumers could buy more than their incomes would otherwise allow.

The early 1970s also saw the end of the gold standard and the advent of fiat currencies.

Financialization really only took off, however, in the early 1980s. Broadly speaking, financialization is the substitution of debt for income and the commoditification of debt into financial instruments that could be sold globally, leveraged and hedged with derivatives.

While definitions of financialization vary, mine is:

Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.

Another way to describe the same dynamic is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

So what happened to the incomes of the wealthiest class and the bottom 90% after financialization kicked into gear? I’ve drawn the line that marks the pre-financialization era from the Financialization Era–around 1982–on the income chart below.

I’ve also correlated the income levels with America’s Nine Classes: the Oligarchy and New Nobility classes are at the top, followed closely by the Upper Caste of technocrats and government Nomenklatura.

After financialization kicked in, the income of the Oligarchy/Financial Aristocracy quadrupled, as their share of the nation’s income soared from 2.6% to 10.4%.

The Upper Caste and state Nomenklatura did OK for themselves, earning between 38% and 58% more when adjusted for inflation from 1975 (just before financialization took hold).

Everyone else–the bottom 90%–lost ground. This is not coincidence or just bad luck–it is the direct consequence of financial games becoming far more lucrative than actual productive work.

This reality is so obvious that even the Mainstream Media has finally felt obligated to accept it: Finance Is to Blame for Rise in Inequality (via Jason Y.)

The government has not been a disinterested bystander in the lucrative boom of finance: the state has benefited enormously on several fronts. As profits soared, so did tax revenues. As real estate bubbled up to new heights, local governments saw their property tax revenues explode higher.

Once the Federal Reserve dropped interest rates to zero (ZIRP) to keep the unproductive financial-gaming machine grinding onward, governments found their borrowing costs plunged, enabling federal, state and local governments to feast on debt by selling bonds.

In effect, the Millennials seeking employment in Wall Street or the government are looking for work in the same sector, because once financialization implodes, both Wall Street and tax revenues will implode, too.

Those benefiting from financialization would have us believe it is permanent, stable and enduring, when in reality it has dug its own grave. Once the collateral holding up the inverted pyramid of debt and derivatives cracks, the entire pyramid will collapse in a heap of counterparty claims and valuations which no longer have any connection to the real world or the market.

The most modest decline in collateral in 2008 triggered the near-implosion of the financialization machine.

Those benefiting from the machine’s appetite for leverage believe they understand its inner workings to perfection. Risk has been eliminated, so we’re told, by hedges and government guarantees.

Believe that fairy tale at your own risk. Researchers who closely examined just one part of the financialization machine’s shadow banking found little to substantiate the widespread assumptions about the causes of the 2008 Global Financial Meltdown: The Role of “Repo” in the Financial Crisis Researchers look at the effect of banks’ off-balance-sheet collateralization of commercial paper in the recent financial crisis.

So if in fact nobody truly understands what triggered the near-collapse of 2008, what supports the current confidence that “it can never happen again”?

Those planning to work for Wall Street or the state might want to look at contingency plans for Life Beyond Financialization. When the underlying collateral finally loses its bubble valuation, the inverted pyramid holding up Wall Street and government tax revenues will collapse.

Promises of wealth and security are far more contingent than is being advertised.

How to forge a career in an insecure economy:
Get a Job, Build a Real Career and Defy a Bewildering Economy
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  • Sunny

    TOWER OF BASEL: The Shadowy History of the Secret Bank that Runs the World!

  • Apr 14, 2015 Delusional Keynesians Pushing Us Over A Cliff – Mike Maloney

    Hidden Secrets Of Money is a world-leading educational series that is sponsored by, and also based on the priciples of WealthCycles. It shows the evolution of gold and silver as money, and teaches the historical economic mistakes that all societies repeat.

    • Bev

      Many do not know that in the past, gold and silver were used by bankers’ as loaned debts borrowed to be paid back, just like today’s fiat paper debt money created by bankers. If gold or silver back a Public/Government Debt-free currency then it can function like Kennedy’s Silver Certificate and Lincoln’s Greenback and the society can prosper. However, if for any reason, the U.S. does not have the gold it used to, the very infrastructure that a debt-free public money is spent to build can successfully back the currency debt-free. You have to take bankers’ debt money creation whether fiat, gold, or silver, away from the bankers. Money should not be debt no matter what backing.

      I could use some help to understand better what might happen internationally. Joe Bongiovanni has commented before at washingtonsblog. Dear Joe, I still need to see all of your videos. If you stop by washingtonsblog, please advise on how all this works internationally. Thank you.

      My best go at internationally, to settle trade balance sheets between nations, the U.S. would want to keep its reserve status as its big advantage is we can print our way out of debt. But, other countries are building parallel systems to avoid our dollars. I don’t know how this will end up. I think that if the dollar is rejected by other countries, we will have to rebuild our own manufacturing base again that we can pay ourselves to build and buy what we need with our own money. If the money is debt, we will not prosper as the system is unchanged-boom for a few and bust for everyone else. If the money is debt-free we have a chance to prosper, and get real needs of people met. The real thing to avoid, is a one national and global system of bankers’ debt money whether backed by gold, silver or not, if it is debt, we will not have broken our chains. The American Monetary System

      • I don’t know how this will end up. Very badly!

        REAL DEBT 25 TrillionSHOCKING!!! First Audit Results In The Federal Reserve’s Nearly 100 Year History Were Posted Today, They Are Startling!

        The first ever GAO (Government Accountability Office) audit of the Federal Reserve was carried out in the past few months due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent
        Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill (HR1207), so that a complete audit would not be carried out.

        Ben Bernanke, Alan Greenspan, and various other bankers vehemently opposed the audit and lied to Congress about the effects an audit would have
        on markets. Nevertheless, the results of the first audit in the Federal Reserve’s nearly 100 year history were posted on Senator Sander’s webpage. What was revealed in the audit was startling:

        $16,000,000,000,000.00 (TRILLION) had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland (see page 131 of GAO Report). From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest.

  • 04/13/2015 Einhorn Slams Bernanke’s Blog, Says Fed Policy Is A “Destructive Force That Shouldn’t Exist Outside Of Fiction”

    “We have passed the point where Jelly Donut policy is merely slowing the recovery. Distortions are now adding risk to the banking and insurance markets and leading to poor incentives for the largest players in the financial system. Monetary policy and regulations have combined like a failed chemistry experiment to create a potentially destructive force that should not exist outside of fiction.” – David Einhorn

  • Bev

    This is the big change that could help everyone, that few know, a debt-free public money system:

    Why we NEED to Have Money Without Having Debt

    Joe Bongiovanni is a second-generation monetary reformer. He has been studying money systems for over 40 years, being the co-founder and co-Director, with J. Peter Young, of the Kettle Pond Institute for Debt-free Money. Joe considers himself a Greenback revolutionist, and advocates for the solution he coins as “The Money System Common.”

    Joe is an important blogger on monetary questions.Though he is always extremely polite, his powerful posts have been blocked from appearing on some sites such as the Naked Capitalist, and some MMT sites; because they cannot answer his points. Bongiovanni’s work is careful enough and accurate, and deserves attention, not censorship. We give it that attention.

    The issuance of money as a debt by the private sector has many harmful political-economic consequences that are simply not apparent to casual observers of either political or social economics. These effects have a profound impact on our society and cause a myriad of crises that cannot be remedied unless the systemic cause is well-understood.
    or in a different format:


    M.A. (Oxon) ; LL.D. (Glasgow) ; F.R.S. ; Nobel Laureate in Chemistry, 1921 ; Author of ” Science and Life ” ; ” Wealth, Virtual Wealth , and Debt ” ; ” Money versus Man ” ; etc.

  • April 03, 2015 Russia to ratify BRICS currency pool deal soon — envoy

    The foreign currency reserve pool of the BRICS group will total $100 billion, Russian Foreign Ministry Ambassador-at-Large Vadim Lukov. Russia intends to become the first country among the BRICS group of the world’s five leading emerging economies to ratify an agreement on the group’s foreign currency reserve pool, Russian Foreign Ministry Ambassador-at-Large Vadim Lukov said on Friday.