Apr 26, 2019
Welcome to Finance and Fury the Furious Friday Edition
On the last episode we talked about the City of London Corporation, a mini plutocracy
Today we are exploring at what point does a financial sector state to crowd out real economic growth? Referred to as the ‘financial curse’
I have found some contradictions to my previous beliefs – research shows a tipping point
Why is finance important?
- We all use it
- Each economy has stages with a financial system
- Reaches an optimal size
- Beyond this point a financial system starts to inflict damage
- Profitable techniques start to impact the creation of wealth
- There is a limit to useful roles of a financial system
The Tipping Point:
- Financial crisis
- Supporting the creation of wealth vs extracting it from other parts of the economy
- Shaping laws, rules, thinktanks and culture
- The damage it does
Measurable impact: link to database
- Finance becomes a net drag on GDP growth and productivity – misallocation of resources
- Negative relationships between rate of financial sector growth and rate of productivity growth
- Bank incentives shift after GDP to debt reaches a certain size
- What do credit booms do?
- The ratio of household debt reflects what?
- What does the IMF study show?
Real life examples:
- Britain and the City of London corporation
- What kind of hit has it put on the UK economy?
- Lost economic output and misallocation costs
- No longer lending into new business, mostly each other, housing and commercial real estate
- USA
- The cost of the 2008 financial crisis
- Australia
- Credit to the private sector surpassing 100% of GDP makes financial sector contribution to economic growth negative
- When interest rates are lower there is less incentive to save and more incentive to borrow
The Unmeasurable
- Finance curse inflict damage in many areas
- Economic, cultural, democratic and social effects
Summary:
- With too little and too much financial sector, we would be doomed
- Resources are being misallocated
- How some investments come at the expense of other investments I own?
- Next week we will dive deeper into the share market and Milton Freedman
Thank you for listening, if you want to get in contact you can do so here.