This post will discuss the vast volume of paper wealth in circulation today; stuff like bonds (together with notes and bills), fiat currencies and derivatives. And yes, it is safe to say that these financial instruments are primarily responsible for the economic mess we are in today.
The underlying reason for the popularity of these different forms of paper wealth is the concept of leverage. Leverage is very simple: Say you buy a house for $1 million while borrowing 90% ($900,000) of that amount. If you did this at the start of the US housing bubble for example, your $1 million house would be worth $2 million in as little as 5 years. At this point, you sell the house, use the profits to pay off the loan and (after subtracting the low interest on the loan) walk away with about $1 million. In other words, thanks to the concept of leverage, your initial $100,000 down payment on the house has grown to $1 million in only 5 years – a phenomenal 900% return.
The promise of such ridiculous returns is the primary reason why these paper wealth instruments have grown so enormous in recent years and why they can turn good people into crazy speculators, inflating massively destructive financial bubbles in the mad pursuit of unearned wealth. Take good notice of the term “unearned wealth”. For all of the massive profits they make, speculators very often add no real value to society whatsoever (they just keep on creating one disruptive speculative bubble after another). This incredibly destructive and unethical concept is discussed in much greater detail on a previous page.
It must be understood that these paper instruments are not real wealth such as real estate, productive enterprise or precious metals. They are nothing other than legal contracts – some numbers on a piece of paper or a computer – enabling them to be created out of thin air. And yes, the possibility of conjuring wealth out of thin air (getting something for nothing) really brings out the very worst in human nature.
Finally, these financial instruments are also chiefly responsible for the dogged persistence of the fundamentally flawed paradigm of perpetual exponential economic growth. Due to the massive amount of leverage they have created in the market, any substantial economic downturn will be absolutely catastrophic (paper wealth serves to lever up both gains and losses). This is the reason why the global economy must grow every single year in order to continue existing (more detail on this page).
Unfortunately, our global growth paradigm is already running into immovable planetary boundaries and continued exponential growth has now become physically impossible. The next decade or so will therefore be very interesting…
So, in case you were wondering; stay as far away from these financial weapons of mass destruction as you possibly can. If you own them already, please consider making an ethical disinvestment and buying something real.