Reframing the Financial System

The US economy has, by many measures, made significant strides in providing for the myriad needs of its citizens over the last few decades. The homeownership rate for all ethnicities has been steadily increasing despite a significant increase in the housing stock and US population – meaning that more Americans live in homeowner-households today than have been ever before. The average US citizen’s life expectancy has generally improved, and their ability and propensity to consume has grown at a steady rate, facilitated by a significant expansion in the US’s financial economy. 

An investigation of the US economy, however, unveils areas in which we, as citizens, can invest more to improve outcomes for all members of our society. Despite improvements in overall US homeownership, the homeownership gap between whites and other ethnic groups has persisted, and in some cases has actually worsened. Since the 2008 financial crisis and economic downturn, median wage growth has slowed significantly, limiting the ability of the median US worker to increase their consumption. The gains from economic growth have increasingly flowed to the wealthiest members of society, while the pain of economic downturns has been spread more evenly. Primarily as a result of this income inequality, recent generations of Americans are less likely to earn more than their parents did – indeed, Millennials are the first generation that appears set to be poorer, on average, than their parents.

The US financial economy sits at the center of the US economy – its role is to facilitate allocation of capital across the economy to drive consumption and growth investments. Since the 2008 crisis, the US financial system, and in particular the US banks, has done an admirable job of facilitating the flow of credit throughout the economy to drive economic growth. This growth, however, has capitalized on humans’ desire to maximize near-term experience through consumption, often at the expense of their long-term growth prospects. The financial economy enables expanded consumption by increasing the amount of leverage that the real economy can bear – using debt to pull consumption from the future. While all this has enabled significant progress for the average and median US citizen, there are limits to the financial system’s ability to drive growth in this manner because investments and returns have not been structured with respect to the progress of individual members of society. In order to ensure a brighter future for ourselves and upcoming generations of Americans, we must reframe how we drive growth. 

In this series of articles, we examine the US financial economy to illustrate areas that we believe can be improved to drive greater economic growth in the future:

  1. Through the lens of the Repurchase Market, we examine the fragilities in the financial economy that are exposed when economic actors prioritize short term profit maximization over the stability of markets upon which they rely. (view article)
  2. Through the lens of Quantitative Easing, we examine how central bank interventions, while essential right now, can externalize the costs of fragilities in the financial economy to future taxpayers because they are not structured to explicitly increase human capability in the long-run. (view article)
  3. Through the lens of Inflation, we examine how people and corporations both underestimate the amount and coordination of human input, and how this impacts our economy’s growth potential. We also begin to lay out a path forward to stronger long-term growth that acknowledges and supports humanity and generates non-diminishing marginal returns to labor. (view article)

These articles highlight issues that we see in the US financial economy – however, we know that our explanations are incomplete. We need your perspective to complete our understanding of the concepts in these articles. If you would like to collaborate with us in this way, please reach out to prithvi@chrisflorquist.com.