Financialization & The Destruction Of The Real Economy

Authored by Charles Hugh Smith via OfTwoMinds blog,

Strip an economy of capital, productive incentives, talent and yes, ethics, and what are we left with? An economy spiraling toward an inevitable collapse.

Financialization is destroying the real economy, but few in power seem to notice or care. The reason why is painfully obvious: those in power are reaping vast fortunes from the engines of financialization--for example, former President Obama: Obama Goes From White House to Wall Street in Less Than One Year.

This is not to single out President Obama as a special case; politicos across the spectrum depend on the engines of financialization to fund their campaigns and make them multi-millionaires, and corporate managers and financiers have skimmed billions of dollars in gains not from producing new, better and more affordable goods and services but by playing financialization games such as borrowing billions to buy back stocks, leveraged buyouts, and so on--all of which have reaped the insiders gargantuan fortunes while hollowing out the real economy.

Financialization necessarily hollows out the real economy, as Gordon Long and I detail in this new video program: The Results of Financialization - Part I (34 minutes)

The key dynamic is that financialization creates irresistible incentives to ramp up debt and leverage at the expense of the real economy. Those who fail to exploit financialization will underperform the market and be fired.

As Gordon explains, if a CEO refuses to load a company up with debt, a private-equity financier with access to cheap Federal Reserve credit will scoop up the company in a private buyout, fire the management, extract immense profits by loading the company with debt, then take the hollowed-out shell public again, reaping another windfall of financialized gains.

Note that the private-equity financiers have every incentive to lay off employees, especially experienced workers who earn higher salaries, to reduce costs before they take the hollowed-out shell public.

How can corporations pay out more to shareholders than they actually earned? Easy--financialization.

Another key dynamic in financialization is limitless liquidity and super low interest rates set by central banks--rates that are so low and liquidity so abundant that corporations can roll over their debt and actually add more debt and keep their interest payments unchanged.

This dynamic inevitably leads to zombie corporations--corporations with low rates of growth and profitability and high debt loads that in an unfinancialized economy would be recognized as insolvent and liquidated.

As we explain, financialization skews the risk-reward in favor of financial games, so real-world investments no longer make sense. Why risk building a factory in the U.S. or training workers when the pay-off is uncertain, when there are so many ways to reap immense fortunes via financial games that are ultimately backstopped by the Federal Reserve or federal agencies (i.e. the taxpayers)?

As many observers have noted, these perverse incentives have siphoned human talent away from productive employment and into enormously well-compensated but parasitic, exploitive financialization-related jobs.

Strip an economy of capital, productive incentives, talent and yes, ethics, and what are we left with? An economy spiraling toward an inevitable collapse. The metaphor I've used to explain this in the past is the Yellowstone forest fire. The deadwood of bad debt, extreme leverage, zombie companies and all the other fallen branches of financialization pile up, but the central banks no longer allow any creative destruction of unpayable debt and mis-allocated capital; every brush fire is instantly suppressed with more stimulus, more liquidity and lower interest rates.

As a result, the deadwood sapping the real economy of productivity and innovation is allowed to pile higher.

The only possible output of this suppression is an economy piled high with explosive risk. Eventually Nature supplies a lightning strike, and the resulting conflagration consumes the entire economy.

The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009)

The Financial Markets Now Control Everything (April 29, 2015)

I explain all this in greater detail in my short book Why Our Status Quo Failed and Is Beyond Reform.

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If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.


7againstThebes Erek Wed, 09/20/2017 - 12:13 Permalink

Good post, Charles.And then there is Amazon, "the river of no returns" ( to use Bill Bonner's witty phrase) , a corporation that prospers not by making a profit but by buying other companies.     It is all so strange.  I suppose with almost non-existent interest rates, not to mention negative interest rates, bizarre outcomes are going to emerge.  But the pieces of an economy have to fit together, not become more and more dis-coordinated.After Amazon buys every company on the stock exchange, still has not made a profit, has a PE 5000, and finally, has to make a profit, what happens?    I'm tired of saying it, I'm tired of hearing other people say it, I'm tired of thinking it, but sooner or later ---- and it looks like later and later and later --- something has to give.

In reply to by Erek

7thGenMO Justin Case Wed, 09/20/2017 - 14:33 Permalink

Mussolini said fascism was actually corporatism which is (I think) the same as corporate socialism.  When we had a hard money system, the power of the oligarchy that owns The Fed to create infinite money to support crony corporations was limited by the natural scarcity of PM's.  However, when their Deep State prick named Tricky Dick took us off the gold standard, Lady Liberty was sold as a harem girl to the Saudi's for one petrodollar (system).  Now, she's a toothless whore, that, after giving oral to Islam, cries out in her old hag voice, "DON'T TOUCH SOCIAL SECURITY!"Edit:  I should add that European fascism, though obviously flawed, at least tried to work for the benefit of native populations.  The Anglo-American-Zio version of corporatism is despicable in that it will throw its own people under the bus through offshoring, H1-B's, etc., which is at least partly responsible for the opiod epidemic we are now facing.

In reply to by Justin Case

Memedada Justin Case Wed, 09/20/2017 - 17:43 Permalink

"The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but to interfere in actual in a most dangerous manner – and this gang knows nothing about production and has nothing to do with it."
Karl Marx, Capital III, p. 532

In reply to by Justin Case

junction yogibear Wed, 09/20/2017 - 11:59 Permalink

Instead of vague terms like "financialization", why not use a real word, "corruption".  With examples like how CMS, which handles Medicare costs oversight, overlooked Mylan drug company overcharges of almost $400 million on EpiPens. CMS knew that EpiPens were a brand name drug product, so Mylan had to give the government a higher discount than the discount percentage for a generic drug.  For some 8 years, CMS auditors were given instructions to lay off, let the government pay the overcharged amount, getting only the generic discount. Only when USA Today began an investigation of Mylan's increasing the price of EpiPens did the CMS start looking into the overcharges.  U.S. Senator Joe Manchin was Mylan's protector, since his daughter was CEO of Mylan, getting her $18 million a year job in part by fraudulently claiming she had a master's degree.  Under the federal False Claims Act, Mylan could have been charged triple damages.  Mylan kept Manchin's daughter as CEO and the U.S. Attorney accepted Mylan's computation of monies due CMS with no triple damages penalty.  Total corruption at the CMS and the Justice Department.Then there is the case of Colcrys, hedge fund billionaire Paul Singer's pill version of colchicine. The FDA gave Singer's company exclusivity on this 2,000 year old gout drug, the FDA accepting fraudulent drug trials that were worthless, drug trials that seem to have caused the deaths of some of the participants after they were illegally given double doses of the drug to make Colcrys look more effective.  Still total silence on this CMS overcharge from the CMS, the Justice Department and, most importantly, the American captive press.

In reply to by yogibear

Consuelo Wed, 09/20/2017 - 11:37 Permalink

  Oh dear Gawd - how many times can these guys re-wrap and re-sell the same old dead fish...?I guess as many times as the next crop of suckers $buys their books... 

Soul Glow Wed, 09/20/2017 - 11:51 Permalink

The "King of Debt" will make Obama's bubble look like peanuts.  Wait until the next Fed Chair is another Neo-Keynesian dove and all the central banks of the world keep easy money going until you wake up one day and the dollar and all fiat has no intrinsic value.

Clowns on Acid Soul Glow Wed, 09/20/2017 - 12:13 Permalink

Oh ya mean that Paul Volcker Jr ain't coming back ?So funny and 1984ish that the Congress criminal critters named the "Proprietary trading rule" in the Bolshevik inspired Dodd Frank Act....the Volcker Rule. This "rule" has nothing to do with achieving and maintaining real, positive interest rates. It does however provide good cover for the Fed as it focusses "blame" on the leveraged excesses on the Bank Holding companies.Its main purpsoe was to obfuscate the fact that Sandy Weill, Robert Rubin and Larry Summers worked to repeal the Glass Steagal Act ...which has made Sandy and Rubin billionaires and Summers = $ 500MM. Ok so it completely crashed the US Banking and Investment system in 8 what?Name it the Volcker Rule and everybody will think that you are serious and the criminals can keep their $$ and be feted recently by Forbes.  

In reply to by Soul Glow

kumquatsunite Soul Glow Wed, 09/20/2017 - 12:17 Permalink

How many foreigners and their endless needs are we paying for?Here is a link to an LA Times story, noting the lawsuits by FOREIGNERS, who believe they have the RIGHT to Our Children's Country, Colleges, Jobs, and Lives. It's said there are 11-20 MILLION ILLEGALS, and then we have let in 60 MILLION "legals" in the last 20 years, mostly from third world countries. Have you been assigned your non-white to tell you how racist you are yet?…, a San Diego attorney, was brought to the U.S. from Mexico when she was 4, according to the lawsuit.The other plaintiffs include two middle school teachers, a UC San Francisco medical student who is working on a public health degree from Harvard, and a PhD candidate in clinical psychology from Fuller Theological Seminary in Pasadena.---I do not believe that given this environment, any non-white will provide me proper dental, medical, or any other kind of care or need. I hang up and call back when calling any business if a black or non-white (accent) answers. Calling until I talk to a white. Racist? Whatever!

In reply to by Soul Glow

Blankfuck Wed, 09/20/2017 - 11:58 Permalink


Deep Snorkeler Wed, 09/20/2017 - 12:01 Permalink

America's Talent and Ethics Were Destroyed in 1968We Must Face the Current Situation1. Trump is our president2. American life is reduced to a TV showwhere reality never intervenes.3. A veneer of civility on an ocean of chaos.4. American suburbs are cartoonsof Jeffersonian America.5. Perpetual war is the product of mental illness.

itstippy Wed, 09/20/2017 - 12:11 Permalink

Something is broken in the capitalist systems of the U.S.A. and Great Britain.  Physical productivity - manufacturing - is on the ropes.  The "rust belts" of formerly prosperous manufacturing areas are dying.  Think Detroit and Chicago.Elsewhere in the world manufacturing centers are thriving.  Areas like Catalan in Spain and much of Germany have high standards of living because they are manufacturing centers.  The most prosperous areas of China and Mexico, aside from a few financial districts, are the manufacturing hubs.  The U.S.A. and Great Britain used to manufacture very high quality goods in vast quantities.  They sold them domestically and also exported them to eager customers all over the world.  Every single garment, appliance, tool, and piece of furniture in my parents' house was Made In America.Please explain how Germany, with it's high labor costs, powerful labor unions, strick environmental laws, high taxes, and intrusive government still manages to kick ass in the global market for manufactured goods.  Why can't we do that anymore here in the U.S.A.?  We're doing something wrong.  

libertyanyday itstippy Wed, 09/20/2017 - 17:39 Permalink

germany exports what?  seriously, Germany is SMALLER than the state of Montana.  The USA and Europe as a whole are industrialized, we are automated and productivity is thru the roof.  we  can produce massive amounts of stuff without any labor.  The rest of the world is relatively backass wards and has no use for what we make.  Our financial system is on the verge of collapse, we can no longer control inerest rates or inflation.........confidence in monopoly currency is abouit to collapse.

In reply to by itstippy

wholy1 Wed, 09/20/2017 - 12:25 Permalink

CHS - One of the few with special insight/discernment to slow-motion train-wreck of the Anglo-American Empire Racket self-destruction.

Xena fobe Wed, 09/20/2017 - 12:40 Permalink

I wonder if it is possible to elect representatives that work for working tax payers.  Or are most voters so stupid, they vote for incumbents due to name recognition.  Do any honest people even run, or are they all afraid of being JFKd?   We already know the problems.  We need solutions.

libertyanyday Xena fobe Wed, 09/20/2017 - 17:45 Permalink

rhetorical post.... the capitalist system has hit the reset point,..... all the chips are on one side of the table and their is no ' legal ' way to redistribute them.  My guess is that our debt based fractional reserve financial system has to be exterminated.Many are going to lose , holders of treasuries and cash are going to find their wealth evaportated.  WE must return to money, gold and silver, banksters MUST be thrown to the wolves.  The usa can never repay its debt, to do so would require new debt to be issued....20 50, 100 some point a major player is going to lose confidence and bail  ......and then the reset can occur

In reply to by Xena fobe

Batman11 Wed, 09/20/2017 - 12:41 Permalink

How can we get away with it without anyone noticing?Neoclassical economics that doesn’t look at private debt. and 2008 suddenly stick out like sore thumbs.They used this economics in the 1920s as well, it's private debt blind spot caused the same problem. shows neo-liberalism works, no one notices it runs on debt.The real estate and financial speculation ponzi scheme that is the UK economy.

abgary1 Wed, 09/20/2017 - 15:06 Permalink

It's the mindless pursuit of perpetual inflation and economic growth by anti-market Keynesian idiots supported by self-serving politicians and bureaucrats who could a fucking rat's ass about you or me.Economic theory, fiat money and the Fed are all fucked!

True Blue Wed, 09/20/2017 - 15:48 Permalink

Hmmm, the moral hazard of easy 'money' at zero percent. Who'd'a thunk?Someone should show this to the dimwits at Forbes who think people are 'better off' as baristas or on welfare than they are barbarously 'making things.'

Faeriedust Wed, 09/20/2017 - 18:53 Permalink

Hummmph.  Any medieval serf knew that if you allowed moneylenders to control the coinage society would be headed for disaster.  It doesn't take more than two functioning neurons.  The problem is the vast array of propaganda which has turned modern minds to mush.  FYI, the average intelligence before the modern age was far higher than it is today.  Idiots survived only under the direct protection of the Church, and under such circumstances were kept celibate and prevented from breeding.Of course, everyone before the Industrial Revolution learned all about animal breeding before they were old enough to fuck.  And had the sense to realize that the basic rules applied to humans just like horses.

Drop-Hammer Thu, 09/21/2017 - 00:40 Permalink

We can thank the Christ-killers for this.  They get the skim off of every transaction and put that money in the bank or send it to Israel.  The jew is truly a blood-sucking parasite.  Hitler was right.