Wednesday, April 20, 2016

The Economy and its Addiction to Finance

Are Americans addicted to the drip of finance?  National debt is at a high point and many families are over their heads in debt. The art of living within your means seems to be fading with each passing decade. Governments are regularly drawing from the trough of borrow today and never pay back tomorrow. At some point we may need to re-balance the economy to ensure its viability.

The Washington Post printed a piece called "Has our economy become too ‘financialized’?" It discusses how the use of finance has doubled over the past 60 years to 20% of the GNP.  Concerns about the stability of the financial system and transparency were brought up in good measure.

It is difficult to argue against the necessity of finance considering that most businesses and governments need finance as a way of keeping their daily operations running. This practice falls back into history centuries. Few can step away from the necessities of borrowing money.

That doesn't mean we don't have an addiction to finance and shouldn't consider making changes that make us less reliant on finance as a major piece of our economy. Having a balanced economy means we aren't too heavily invested in one sector over another.  As the global economy changes we have the diversity needed to adjust with grace.

It is important to remember that money isn't wealth in and of itself. It means its value is ever changing and doesn't hold the same weight as a manufactured good, bushel of corn, or a cubic foot of natural resources. We use money because we "trust" it has value. Money is more subjective and prone to inflationary problems compared to other products.

We should also consider some of the problems associated with the financial collapse of the Great Recession. The financial industry is prone to risk taking and we often don't know the consequences of the risk/reward bubbles until it is too late.  A powerful finance industry is prone to unnecessary risk taking with national, if not global, consequences.

Over reliance on the financial industry creates inherent risks related to lack of economic flexibility similar to the over reliance on any industry. Because we are  heavily reliant on finance, on an individual and national level, we must come to accept the inherent risk of high debt and lack of liquidity. Ensuring we have strong fiscal management strategies and economic diversity we can strengthen our competitive position while making baby steps to a solid financial outcome.

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