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Real versus Fictitious
The COVID-19 pandemic is stretching the contradictions of the present economic arrangements to the limits. The system survived inflating financial assets and feeding on inequalities. The divide between the real economy and the sphere of finance cannot be left unchecked without risking an economic catastrophe. Wealth and income inequalities cannot be pushed anymore without irretrievably damaging the underlying social contract. The virus is making change inevitable.
“Fair is foul and foul is fair,” so said Shakespeare’s three witches. In the same way, the current times are characterised by the confusion between the real and the fictitious. Financial assets are, at best, claims on real things. They are fictitious assets because they are of no intrinsic value; they are useful only by virtue of their ability to command real assets and goods and services that can satisfy human wants. The stock of financial assets has been growing faster than real things they represent over the many decades. But, the gap has widened alarmingly in recent years. For instance, the ratio between market capitalisation of listed domestic companies and the gross domestic product (GDP) in the United States (US) increased from 52% in 1990 to 148% in 2018 (World Bank 2020). The growing divide between the real and the financial has also been a major source of wealth and income inequality in most nations. The overaccumulation of financial assets would not have been a problem had it not been upsetting the world of real things. As I shall demonstrate subsequently, the COVID-19 pandemic is threatening to deepen the divide between the real and the financial, besides aggravating inequalities. If asset price inflation is allowed to continue unabated, it would lead to unparalleled economic devastation. The consequent economic catastrophe would necessitate a complete overhaul of the social and economic order.
The financial assets and the real things they represent are not the same. That they are not the same is what makes the world of finance possible. That they are different is also the reason for the occasional breakdown of the trust in the system. The relationship between the real and the financial is essentially dialectic in nature. This article is not an attempt to undermine the importance of financial evolution. Financial growth undoubtedly has helped the development of the real economy in many ways. But, that it can turn out to be highly disruptive is also borne out by economic history. The owners of financial assets would wish to have a reasonable return on their investment. But, can the claims on real things grow independently of the availability of the real things? It can grow only till the faith or trust in the ability of the financial assets to command real things lasts. Once the trust is broken, everything crumbles down. Mountains of fictitious assets will disappear into thin air. Millionaires might become penniless overnight.
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