When I was little, my grandfather used to give me work tools from time to time. He started with a hammer and nails. Gradually (also buying other items on my own) I created my toolbox which is still very useful to me today.
But imagine if, instead of keeping those precious gifts, I had resold them from time to time. To make a few dollars. Then bought other more expensive tools and then resold them again.
Maybe I would have a few more coins in the bank today…maybe not too. Because every time a hose in my house, a window, or the lawnmower broke, I would not have had the equipment I invested in that is still very comfortable today.
I started with this very basic example to try to make you understand what is happening to our economy today.
The money – especially that of large companies, the money of wealthy people who could run the economy, or powerful corporate groups – ends up in finance.
In the stock market they can multiply them more easily than in the real economy. And then piece by piece billions of dollars have been taken away from the modernization of factories, the investment in research, the restructuring of the building stock, and the creation of new entrepreneurial activities.
With this process, those who have lost are 90% of the population.
This phenomenon is called financialization.
HOW DOES IT WORK?
The financialization of the economy is leading to the death of the real economy.
Finance is dominating and the markets are now taking mountains of money from our wallets. Because?
Because this process has emptied industries, destroyed jobs, and left entire communities struggling to survive.
The real economy is the part of the economy that produces goods and services. It is the part of the economy that most people are a part of. And it is the part of the economy that is killed by financialization.
Financialization ends up becoming the process by which finance comes to dominate an economy. A phenomenon in which more and more money flows into financial assets such as stocks, bonds, and derivatives, instead of flowing into productive investments such as factories, infrastructure, or research and development.
This has important consequences for our economy and for us as individuals.
When finance dominates, it doesn’t matter if a company is making a profit or not. All that matters is whether the share price goes up or not. So companies are now geared towards pushing their share prices up, rather than making products that people want or need.
I want to specify that I am exasperating this concept. It is clear to everyone that there is always a real economy that works in part. It is thanks to this that we find products in the supermarket, household items in department stores, clothing, technology such as smartphones and TVs in stores.
However, it is no longer expanding as the real economy should. It does not innovate, it does not produce jobs, and therefore higher wages. Therefore more money in the wallets of the masses, which is the spending one which makes the economy run.
This financialization process has emptied many industries. For example, the automotive industry. In the past, car companies made money by designing and selling cars. But now, they make most of their money through things like financial engineering, selling insurance and loans to clients, and selling parts of their business to investors.
The same is true of the pharmaceutical industry, the food industry, and even the education industry.
All these industries have been conquered by the finance of the markets. As a result, they are no longer focused on making products that people want or need. They are focused on making money for shareholders and CEOs.
As a result, 90% of the population has lost as finance dominates our economy.
HIGH FREQUENCY TRADING
One of the main drivers of financialization has been high frequency trading. High-frequency trading is a form of automated trading that uses algorithms to buy and sell assets at the speed of light.
High frequency traders make money by taking advantage of small price differences in assets. They don’t care about the underlying value of the asset, they just want to make a very quick profit.
High-frequency trading now accounts for over 50% of all trading volume on stock markets around the world. And it is responsible for rising stock prices, even when there is no underlying economic reason why they should go up.
This type of speculative trading has become so prevalent that it now dominates our economy. And it’s one of the main reasons finance has beaten the real economy and taken over our lives.
THE RISE OF THE SHAREHOLDER
Another driver of financialization has been the rise of shareholders. In the past, companies were owned by a small group of people, who were typically the managers of the company. But now, companies are owned by large numbers of shareholders, who are often not even interested in the company’s underlying business.
They only care whether the stock price goes up or not. So companies are now geared towards pushing their share prices up, rather than making products that people want or need.
This ownership change has led to a fundamental change in the way businesses are run. Instead of being managed for the benefit of all stakeholders, they are now managed for the benefit of shareholders.
This has had a number of negative consequences. For one thing, it led to a huge increase in executive salaries. CEOs now earn hundreds of times more than the average worker. They are often paid in stock options, which means their primary motivation is to drive up the stock price, rather than making products that people want or need.
It has also led to a decline in investment in long-term projects, because shareholders are only interested in short-term gains. This has been disastrous for the real economy, as long-term investment is essential for economic growth.
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