The one big problem our capitalist system has is that it inherently causes money to flow from the poor to the rich. This shows in the figures. In 2010, 388 people owned as much money as the 3.4 billion poorest. In 2016 that number changed to 8 people holding the same amount of wealth as the 3.6 billion poorest. Money just has a strong tendency to flow to the financial world. Once it gets there it just runs around in circles, adding no real value to our society. But it does increase the wealth of the wealthy. The entire financial world is actually a huge pile of money just sitting there, doing nothing but shifting place from one pocket to the next. Sure, a little bit, according to some estimates around 15%, trickles down to the rest of us again. But obviously not as much as is being sucked into it. Otherwise it would be hard to explain the numbers from this chart that gives an overview of all available money that exists in the world. Here’s a small excerpt of those numbers:
- $28.6 trillion: readily available money (coins, banknotes and money on accessible accounts)
- $70 trillion: value of the stock market
- $600 – $1200 trillion: value of the derivatives market
If trickle down economics would really be a boon for society then these numbers should be more in balance.
Why is this? The answer is fairly simple: hoarding money is rewarded with more money. Yes, this is a simplified statement but once you get your hands on your first couple of millions it becomes ever easier to increase that amount if you play the financial markets right. And when you have enough to spare you can spread your risks and make sure that there’s no real danger to losing it all.
But these people invest in business I hear you say. Yes, they do … if they can turn a profit from them. More often than not, a successful startup eventually turns into a money machine for just a few people. Take Uber for example. Who is getting rich you think? The drivers or the people at the top? Again, most of the money flows to … pools of money.
This is a mostly one directional flow, which is bad news if you’re on the wrong end of it. It looks like this:
Debtors and bank employees are also account holders but are displayed as separate entities to keep things clear.
The ‘real’ economy is the market of product and service providers which are not related to the financial market. Every member of this ‘real’ economy is also an account holder.
The money a debtor receives on her account is created by the bank, out of nothing. When the debt is payed back, this money is destroyed again together with the debt. The interest is profit for the bank. For a debtor, the income flow must be higher than the spending flow if she wants to be able to pay back the loan. That surplus on the income flow is at least partly used to pay for the interest on the loan and the bank costs. This process extracts money from the ‘real’ economy.
An account holder must make sure that the sum of his income, interest on his account and his profits and dividends are at least as high as his spending. Or become a debtor. If the income is high enough he can save some money for later. Once the sum that is saved reaches a certain volume the likelihood that it will be invested in the financial market rises due to the low to non existent interest that is gained on bank accounts these days. If interests were high, the money would just be kept in the bank, which also results of it ending up in the financial markets (see below). Once this happens most of the profits and dividends are probably reinvested in financial products, thereby keeping money in the financial markets. Also note that, if the income is largely received through the ‘real’ economy, part of that money now flows through to the financial markets.
Interests on loans, and profits and dividends from financial investments received by the bank which are not spent on wages and operating costs are also mainly reinvested in the financial markets. Banks also use a large part of your deposits for this purpose. This is possible because banks are not obligated to keep the total sum of all money on the accounts they manage available as reserve. This means that a lot of the money that people think is on their bank account is actually running around in the financial market.
As you can see, unless money is forced out of the financial markets, it has a strong tendency to flow towards Wall Street and consorts where most of it remains. This impoverishes the ‘real’ economy.
The model presented here is simplified but captures the core flows of our monetary system. It’s easy to see how the flows depicted by the orange arrows all contribute to helping money reach the financial markets. Once it reaches those, it tends to stay there. You could conclude that the financial markets are a dead end for monetary flows.