One of the means by which people are fleeced by our financial system is through misrepresentation of wealth. Some of this misrepresentation is deliberate. There are entire segments of the financial system that depend on "asymmetric information" and deliberate deception to make money. Much of this is perfectly legal. But some of this is the result of bad guesses, speculation. Both kinds of misrepresentation lead to cases where the apparent value of an economy is greater than it's actual value. This is literally what is known as a "bubble." I call them swindle bubbles, because often the effect is deliberate. As Stiglitz explains when explaining why economies are unable to borrow the money needed to reflate after a swindle bubble pops. The reason they can't borrow is that the bubble itself resulted from, contributed to and was eventually destroyed because of speculation. Indeed a kind of speculation that results in Pseudo wealth. Pseudo-wealth results from a kind of speculation where the aggregate perception of wealth is greater than true wealth. As Stiglitz explains:
"before the crisis" there are "differences in views, e.g. about the likelihood of the housing bubble breaking, gave rise to bets (speculation), which led to the creation of pseudo‐wealth — with both sides to the bet believing that they were going to win, both believed that they were wealthy, or more precisely, the aggregate perception of wealth was greater than true wealth. After the crisis, pseudo‐wealth got destroyed. Indeed, there was even negative pseudo‐wealth: borrowers may have believed that what they would pay, in expected value terms, to the lenders was greater than the leaders believed that they would receive." [Earlier Post]
Or more precisely, the system transferred wealth to those who "won" the bets, successfully swindled their marks, rigged the system, or had the greater economic power to enforce collection on the now bad debts, or the underlying assets that secured them. In good times people are induced to 'bet the farm'. In bad times, the farm gets taken by the house that made the loan.
Schrödinger's Cat Meets Creative Destruction
In essence pseudo-wealth is sort of the Economic equivalent of Schrödinger's "Schrödinger's cat" theory. People make bets, and nobody knows who is going to win the bet until the conditions the bet refers to materialize or fail. It's as if they bought a lottery ticket and acted like they'd won the lottery. Until the drawing everyone thinks they have something that it later turns out most of them don't have. Most people wind up realizing they've been wearing invisible cloth and owe a home or other security to pay for it. And since the folks who run the casino also manage most of the bets. The "Casino" or banks wind up with the real cloth and the homes given as security to buy the "fine cloth that only a fool can't see."
Pseudo-wealth and Rent Seeking
I refer to pseudo-wealth a lot so I wanted to highlight the idea. And it turns out that Schumpeter's "Creative Destruction" is simply the combination of the constant power of wealth to seize property from producers using pseudo wealth -- and bubbles -- and the operation of entropy (which makes all wealth perishable except the kind of pseudo-wealth that money represents) and inertia.
This is because there is another kind of pseudo-wealth. That wealth is the possession of notes with interest based on ownership of abstract entities like Banks, Securities, Corporations or any entity whose measurement is subjective, but where the notes are "on paper" or in "electronic form." Without the ability to con people, much of that wealth vanishes for the cons rather than the conned -- who usually are the ones who actually produced it. It's their dirty little secret, without constant refreshment of value, via transfers from production, for these entities they degrade and vanish on their own. Financial Capitalism only exists by swindling people. Without the ability to extract rents, the rent seeking fails.
Sources and Further Reading
- Earlier Post "Joseph Stiglitz Slams Bad Economic Models
- "Towards a General Theory of Deep Downturns Joseph E. Stiglitz"
- Related Guzman Article: