Posted 2 years ago on June 20, 2012, 2:37 a.m. EST by Misaki
This content is user submitted and not an official statement
The financial markets are very complex. This complexity leads to a transfer of wealth from stupid people to smart people, but this is a specialized kind of intelligence that relies heavily on knowledge of how the system works and the status of many different variables at any given point in time. Inflation plays a special role in that it encourages people to participate who are not fully prepared on what to expect and penalizes those who save money outside of the financial markets.
The result is that people have an unrealistic idea of the gains that can be had from uneducated investment in financial markets and the true value to the nation from variations in prices offered in those markets. It is possible to make a profit from such an investment, but this is only because governments continuously spend money to redistribute wealth to the poor which also allows professionals in the financial sector to obtain an even higher return on investment. In a society without deficit spending or significant redistribution from taxes, many people would no longer see significant returns from investment and the best choice would often be simply to allow saved money to collect a low rate of interest in a bank account.
In other words, for some people to see realized profits—and not just future profits if prices are still high when the decision is made to exit the market—there must be other people who are losing money in the financial markets. At our current levels of productivity, workers in the financial sector and their wealthy clients end up with much more money than they can spend, removing money from circulation which leads to unemployment if prices do not decrease. It then becomes necessary for the government to provide the losers in the market with more money so this cycle, and the economy as a whole, does not stall. Fixing this situation requires ending the policy of continuous inflation so people do not feel the need to take risks which they underestimate, and also preventing harmful effects from occurring when someone does gamble away their money to the profit of other market participants.
It is important to understand that the use of the accelerated work week, which would reduce unemployment and inequality and allow for an end to inflation, could cause significant short-term harm in the markets as participants deleverage and long-term expectations of price increases fueled by government spending disappear. Retirement or other types of funds with insufficient agility due to complacent management could suffer large losses as prices drop.
Explanation of Leveraged Investments and Risk
The idea of financial leverage is relatively simple. You borrow money, but unlike when purchasing something using a credit card there is almost no chance that you will be unable to pay back the loan because the product you buy can be immediately resold at a very similar price. This means there is very little risk for creditors as you can be required to forfeit certain assets if current market prices require it. To succeed, then, requires not only knowing when to buy and when to sell but also how much risk to take on in the expected fluctuations of one or more market prices.
Since the investor takes on the risks, loans can be obtained at low rates and profits can be very high if the future market price, and variations on the way, can be accurately predicted in a way that other market participants have not done. However, these potential gains are also the source of market instability since that instability rewards those who correctly judge risk at the expense of those who underestimate risk in their attempt to maximize gain.
Due to the size and complexity of the financial markets, this instability compounds itself as opportunities for profit from misevaluation of risk occur momentarily throughout the system. While fluctuations smaller than the difference between buy and sell prices at any given moment cannot be profited from, the inherent tension between many opportunities for profit and the possibility of unexpected price changes of various ranges and durations prevent any participant from ever eliminating uncertainty about the best investment choice at any point in time.
What this means is that even a profitable investment would not be held continuously by an optimal participant. Momentary events elsewhere in the system mean that cash would best be used elsewhere, either to buy into something like a certain corporation's stock shares just before interest the stock attracts reaches a critical point with slightly less competent participants buying into the same stock a few moments later (to be sold at a peak to successively slower and less competent market participants) or to "short" a stock just before it drops drastically in price. That transaction completed, the funds would be shifted back to the previous investment which offers a slightly lower continuous rate of return for the amount of cash that is held in reserve for the expected level of risk.
You may think that, when investing in futures for example, it is best to use the maximum leverage ratio and retain only the cash reserve required in the contract terms that define the loan, but this underestimation of risk is exactly what allows other people to profit and you to lose your investment. Due to the competition for investment described above, timing is also important to understand future price changes and can depend not only on the product itself (such as cost of potential storage for a futures contract) but also factors that cause the market's attention to focus on certain products at any given point in time.
The complexity of the above factors are what make it difficult for any single investment manager to provide consistent returns above the market average. Any manager who did would be pressured to accept more funds, which would lead to more income for the investment manager but the number of opportunities they see for investment would not significantly increase, meaning that more recent investors in the fund would benefit at the expense of previous investors, driving down the effective rate of return until it is roughly the same as for every other investment manager.
The point of the above is just to show that taking on too much risk is just as bad as taking on no risk at all, and most people are not really suited to analyzing the financial markets nor should they need to. The end result of the profits of the financial sector is something which most people are already aware of—wasteful government spending on programs and jobs that people feel do not justify their cost to taxpayers or that lead to further deficit spending and inflation.
However, since many non-financial corporations also have high profits, we can't say that the financial sector (which includes investment banking and companies like Goldman Sachs) is a bad thing since it does lead to more jobs for smart college graduates. This is why job creation outside of government is necessary before ending the policy of continuous inflation and its indirect subsidy of financial profits.
Plan for the Future
It is not realistic to expect government agencies to spend less money. Suppose that jobs in the private sector provide on average X utility to society. You are the head of a government agency, and some people who work for you provide X utility while others only provide X/2 utility. The government is offering to give you even more money so you can "create jobs". Do you 1) Accept the money, and employ more X/2 utility workers. 2) Reject the money and let another government department have it. 3) Fire your existing X/2 utility workers so you can return even more money to Congress and taxpayers.
Suppose you chose the third option. Now, government has become very efficient but unemployment is even higher. The tax money went back to taxpayers, which mostly means the rich, and they already have plenty of money so even if they spend some of the savings it will probably just go to corporate profits and back to another rich person. As we can see from this example, and also from the Great Depression, "a more efficient government" does not really help anything when the 'problem' is high productivity and inequality.
So as you can see, we need a more innovative solution. The accelerated work week where high-income workers are given the choice to work less time would solve unemployment and reduce inequality in any country. For example, the main trading partner of Greece is Germany which has a reputation for high-quality products. Greece has one of the longest average workweeks of all European Union countries but a very high youth unemployment rate right now. If high-income Greek people were to work less, they might be more willing to purchase locally made products instead of high-quality but more expensive German products, reducing the trade deficit and causing money to circulate within the economy. This leads to more jobs and tax revenues to pay off debt. Meanwhile, unemployment in Germany rises due to lower exports to Greece, which increases German spending on social security unless they also start using the accelerated work week.
Here in the United States, the amount that people think the federal government wastes has risen to 50 cents out of every dollar. We must take a stand against inflation and wasteful government spending. Our political leadership must promise to make any necessary legislative changes in support of the accelerated work week. If they do not, we vote them all out of office no matter what party they are, and any candidate we vote for must promise to end the lifetime pension benefit for all past and future members of Congress as well as support the accelerated work week.
This will end unemployment, lead to reduced inequality by reducing profits for all corporations that sell to consumers in the United States, and allow a policy of no more inflation. This will lead to lower crime, allow us to give more attention to environmental issues, and have many other positive benefits. The younger generation understands that all of this is possible, and so this is what we should do.