Wednesday, November 30, 2011

Financialization, Inflation, and DC

In the Washington Post, Steven Pearlstein recently discussed how investors have moved from investing in production to investing in finance. As a result, we see rapidly expanding investments not in commodity production -- like in the production of wheat, corn, coffee, and other food items, as well as housing, oil, and natural gas -- but in commodity futures, betting on changes in the markets for these commodities. The expansion of investments in and profits from finance, as opposed to production, is called financialization. As I discussed earlier, financialization is not new (it has been growing since the 1970s), but now financialization is quite extensive. According to U of Michigan sociologist Greta Krippner, financial sector profits rose from 10-15% of total profits in the US economy in the 1950s-1960s to more than 40% of total profits in 2001. The popularity of financial investments and the self-fulfilling belief that increasing profits from these investments will continue indefinitely is driving up the prices of the commodities themselves. According to Pearlstein:
Little did you know that it’s no longer the supply and demand for companies, houses, office buildings, natural gas or wheat that sets prices. More likely it’s the supply and demand for the futures, swaps and other derivative instruments linked to those things.
Now, as a result of financialization, prices are not so tied to real supply and demand for things, so we see new levels of inflation in food and real estate prices. This is particularly distressing for those living on low incomes in the US and in the developing world. The DC area is experiencing this too. This graph shows the increase in consumer prices in the Washington-Baltimore area since 2001 (Bureau of Labor Statistics data):

Financialization does not seem to be going away. How will those living in poverty deal with increasing prices? What will happen to those who have lost their jobs and their housing? Or could financialization go away? Would supply and demand for things themselves reappear? Would investment in the production of things expand? Since so many pension funds invest in finance, what would happen to pension funds? What might replace financialization?

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