by Charles Hugh Smith
Of Two Minds
This devaluation of financial wealth–and its transformation to a dangerous liability– will reach extremes equal to the current extremes of wealth-income inequality.
Financial capital–money–is the Ring that rules them all. But could this power fall from grace? Continuing this week’s discussion of the idea that that extremes lead to reversions, let’s consider the bedrock presumption of the global economy, which is that money is the most valuable thing in the Universe because the owner of money can buy anything, as everything is for sale. The only question is the price.
Reversion to the mean is a statistical dynamic but it is also a human social dynamic: for example, once the social / financial / political pendulum reaches Gilded Age extremes of wealth/income inequality, the pendulum swings back. The more extreme the inequality, the greater the resulting extreme at the other end of the pendulum swing.
In the heyday of the postwar boom in the early 1960s, finance–banks, lending, mortgages, loans, investment banking, derivatives, futures, FX, all financial market trading, research firms, hedge funds, mutual funds, etc.–was about 5% of the economy. It now exceeds 20% of the economy, and its actual role and impact is much larger than 20%. Finance is now the dominant force in the economy in terms of wealth creation and influence.