Financialization increases inequality and leads economy to a dead end

Yashin, Pete (2020): Financialization increases inequality and leads economy to a dead end.

Abstract

Modern capitalists multiply their income and wealth largely due to revaluation of the financial assets, which often has no roots in the real sector of the economy. The assets’ market price may exceed the corresponding liabilities of their issuers. Such excessive part of the assets’ value is not secured by anything; it forms an unsecured component of their owners’ wealth. This unsecured component is one of the main reasons for the observed wealth-to-income growth. We have shown that the increase in unsecured wealth necessarily increases inequality. So, the large wealth-to-income ratio indicates inequality strengthening. The rising inequality leads to the impoverishment of the poorest households and inhibition of economic growth. This is facilitated by an imbalance between the total savings and investment which unsecured income causes. A part of the capitalists' huge savings is absorbed by the unsecured growth in the financial assets’ value and do not materialize as capital investments. In fine, the consequence of financialization is the growth of unsecured income and wealth, which entail the rising inequality due to the outstripping growth of the largest fortunes. This causes an imbalance in economic growth and drives the economy into a dead end.

• Item Type: MPRA Paper
• Language: English
• Keywords: New stylized facts; wealth residuals, unearned income; unsecured wealth
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; G - Financial Economics > G0 - General > G01 - Financial Crises

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