Eye-opener: systemic instability grows with concentration

The vertiginous global process of concentration of assets and income, and the resulting growth in social inequality, is one of the main factors that account for systemic instability affecting global safety and sustainable development of nations. The situations become untenable and finally explode when the measures adopted to deal with the problems caused by concentration, instead of solving them, make the problems worse. It hurts to realize the uselessness of the efforts and the transformations that could have been accomplished with such funds.As the result of the way in which the global economy works, some nations concentrate a huge proportion of global wealth and also, on a domestic level, wealth and income become concentrated in some population sectors to the detriment of the others. This concentration and inequality process happens in almost all nations at varying degrees, depending on the particular case. In Southern countries, inequality occurs with the aggravating factors of extended poverty and indigence.

Economic concentration is one of the main factors generating crises and persistent social turmoil. This sustained concentration is supported by some economic dynamics that exert a negative impact on society and the economic system itself. Situations become untenable and finally explode when the measures adopted to deal with the problems created by concentration, instead of solving them, are ineffective or make those problems worse.

(i) Moving further away from organic growth

The concentration process establishes the preeminence of a minority which is becoming richer and the subordination of large majorities that fall behind in terms of income and productive capacity. This causes serious economic and social distortions.

Concentration of assets and income creates a gap that widens over time between the supply of goods and services of a productive system always trying to grow and a demand side that is limited by the amount of its income and, accordingly, cannot fully absorb that supply. In the light of this situation, several responses can be tried that, if well structured and managed, could complement one another and create virtuous development dynamics, but if badly structured or managed, will end up sliding towards a crisis similar to the one currently experienced by affluent nations.

In most cases, the responses do not seek to transform the dynamics behind the crisis but rather try to restore the pre-crisis order. The social and economic cost of the “restoring bailouts” is huge; few governments have enough clarity or power to propose a different allocation of those substantial resources. It hurts to realize the uselessness of the efforts and the valuable transformations that could be achieved with such funding.

Thus, for example, the gap generated by a concentration process between a dynamic productive system and a weak demand [[The process of economic concentration segments demand: those favored by concentration conform a conspicuous demand segment that sets them apart from the others; on the other hand, there are low-income sectors that only partially satisfy their basic needs, and medium-income sectors that, once those basic needs are satisfied, will try, induced by publicity, to copy the superfluous consumption pattern. Conspicuous demand leads the productive system to produce the goods and services required by it, strengthening with their purchases the companies that supply them; as a result, it is in these companies’ interest to maintain the consumption pattern and the concentration process that supports it.]] which, due to insufficient income, cannot absorb all the goods and services produced, is dealt with not by improving genuine income (that would involve affecting the concentration process itself) but by facilitating financing. Placing loans in medium- and low-income sectors invigorates demand that replaces the lack of sufficient genuine income with such financing. Credit is a powerful tool that facilitates economic operation, provided always that the payment capacity of borrowers is not exceeded. But if this concentration process is not altered, that gap between effective supply and demand will tend to reproduce and the need for financing will become permanent, thus compromising the payment capacity of indebted families. In this precarious situation, any triggering event will burst this financial bubble. When the chain reaction becomes systemic, we no longer can explain the situation as poor or unlawful management by certain financial operators. That management, used to operate with impunity and signed by greed, is accountable for causing the explosion, but it was the concentration dynamics, which wouldn’t or couldn’t be changed, what created gaps and distortions in the first place. These situations became worse after wrong substitute solutions are adopted, such as the widespread over-indebtedness which created the untenable financial bubbles that have led us to a crisis.

(ii) Concentration of huge financing surpluses

Let us consider that same concentration process but from the point of view of those that benefited from it and who accumulated huge financial surpluses that need to be recycled.

This falling behind of demand as a result of the concentration process reduces investment opportunities in real economy as well as the related profitability. On the other hand, in this scenario of weak demand and need to maintain production levels, the financing system finds a profitable opportunity by structuring new products designed to finance consumption. With the promise of good profits and by concealing systemic risks, they succeed in attracting surpluses that need recycling, but do not explain that, since the foundations of their financial engineering are not extended (in the form of a demand side strengthened by genuine income obtained from transforming the concentration-prone dynamics), the economic situation and their bold financial schemes become inherently untenable.

This is what happened with subprime mortgages and other consumer loans (credit cards) which marked the breakout of the current crisis in affluent nations.

(iii) Chain reaction and the futility of restorative adjustments

The breakout of the crisis gave rise to a chain reaction when it became apparent that the huge income gap had been transitorily and artificially closed without altering the causes that created it. The concentration process kept its vigorous dynamics and increased the mismatch between the growth rate of production supply and the growth rate of genuine income; as a result, demand continued to lag behind. In order to bridge the gap without affecting the concentration process, the economic system required that more and more funds were injected: a pyramid scheme similar to the one that has landed some notorious conmen in prison for life even though, given its systemic extent, it involved infinitely higher figures. One cannot but think about the fact that a con by an individual is penalized by law, while one structured as an economic policy with even more devastating effects has a very different treatment.

The chain reaction pierced the veil of secrecy and revealed the fragility of a concentration-prone manner of operating that entails inherent systemic instability. This bubble burst was not limited to subprime mortgages and credit card markets; the debacle also dragged the rest of the economic system of the United States and then extended to cover the European nations. When the curtains were opened, the breakdown of organic growth and the resulting consequences of adopting substitute solutions were exposed: an untenable position of over-indebtedness.

The impact was bigger when it became apparent that the over-indebtedness did not only involve families, productive units and financial institutions that had profited from those schemes, but even sovereign countries that had used such a formula to support their way of functioning without altering the concentration that was undermining their foundations.

The tragedy, however, became worse when the very forces that had supported the concentration process were able to enforce restorative bailouts. Faced with the obvious and imperious need to adjust economic and fiscal operations, the measures adopted were not designed to transform concentration and set the foundations for sustainable development, but rather to close gaps, reduce deficits, thus affecting even more the genuine income of majority sectors and aggravating the falling behind of demand and reinforcing concentration-prone dynamics. History shows that there aren’t only losers in a crisis: the majorities that have to bear the heavy burden of restorative adjustments are always losers, but there are winning minorities that profit from the misfortune of others and emerge even stronger from turmoil situations.

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