October 5, 2011 Finance Interviews 0

If so — if this is really about “the 99%” — then you need to understand a few things.

Some of you already do.  To those, this article is redundant.  To the rest, and to the majority of the people in this nation, it is not.

Last night I appeared on Dylan Ratigan’s show.  You can watch the segment, and should.  I used the word financialization, which a few people emailed me about and asked me to explain.

Thus, this Ticker.

So what is financialization anyway?  It is the process by which something very ordinary (say, a TV set) becomes financed. In doing so there is inherently created the use (and usually the abuse) of leverage.

What is leverage?  Leverage is simply the ability to act as though you have much more of something than you really do.  For example, you can use leverage to pry off the lid on a beer bottle.  Your raw strength is multiplied by the lever (the bottle opener) to lift the cap.

But note that there is no free lunch.  While the opener may multiply the force applied to the cap, the distance the opener moves is proportionally reduced compared to the movement of your hand.

In economics, leverage is the use of debt to pretend to have more economic surplus (that is, purchasing power) than you really have.

Let’s take a TV set.  If you save up the money to buy one, then go into the store and pay for it, you now own a TV set.  There is no leverage involved; you took your economic surplus from working (which you didn’t need for food, energy, shelter and clothing – thus, it’s a true surplus to you) and you expend it on a TV set.  The transaction is simple; once it is completed there are no residual effects.  If you lose your job the next day, you still have the TV set and will forever more until it either breaks, wears out or you dispose of it in some way.

But what if the TV set costs $500 and you only have $100?  Well, you could financialize your acquisition of the TV.  That is, you could borrow $400 by buying the TV on installment payments with a $100 down payment, and now you have a TV.

Or do you?

Actually, the bank (or the store) owns a TV.  You may have custody of a TV set, but you don’t own a TV set. You owe a debt.  You have promised to work tomorrow to cover the expense of the television. You don’t own the TV until you pay it off.

This is all fine and well up until you lose your job.  Now the bank comes after you and wants the TV back, plus whatever deficiency there is on reselling the TV set to cover your debt.  You suddenly discover, much to your chagrin, that you never owned it at all.

This all sounds pretty ordinary, except that the economic effect of financializing that transaction isn’t, in fact, ordinary at all.

See, in economics there is this thing called “supply and demand.”  The more demand there is for something with a given supply, the higher the price tends to be.  In ordinary times a gallon jug of drinking water in a store is a dollar, and from the tap it costs so little we don’t ordinarily put a price on it.  Yet if there was just a hurricane, and there is no fresh water available, what would the price of that same gallon be?  Ah, now we have much demand and very short supply, and as such the price will be quite dear.  Perhaps the price of that water might be several gallons of gasoline (for the seller’s generator, of course.)

via OWS: Want To Turn The Tide? in [Market-Ticker].