image1 image2 image3

PRODUCT.|PHILOSOPHY.|LIFE.

What happens after a financial crisis?


Tomorrow, if you have a medical or some other emergency that needs you to spend a thousand dollars, what would the real cost of that be to you?

For a lot of us, we will pay the amount and then have it reimbursed later from our insurance company. So, there is no real cost to us.

What if the amount was ten thousand dollars? Or a hundred thousand? Or a million? If you think a million is never going to happen, think again. Your house could be burned down, or vandalised.

Would you be able to weather that?

The amount that one can weather without the real cost cascading into an unmanageable spiral is the financial shock factor of a person. This is the measure of real wealth.

Someone who is heavily in debt (to the tune of millions like Vijay Mallya) can potentially have a high financial shock factor as compared to an honest businessman who runs a profitable business earning a million dollars a year in profit. This is because what you can borrow from friends, from family and from banks in order to weather a financial shock results in an increase in your financial shock factor.

What happens when there is a financial crisis? Or some economic crisis? What happens when we see another sub-prime mortgage housing crisis like we did from a decade ago?

A financial crisis divides people on two sides.

One side has people that cannot weather the shock that has occurred and the other side has people that can weather the shock that has occurred.

What happens next is interesting. The people who cannot weather the shock are in deep trouble. They are now desperate to earn money that will put food on their table and pay rent to keep a roof over their heads. The will be ready to do anything. They won't have the luxury to shop around for the best paying job for their skillset because that takes time they don't have. So, they settle for lesser than what they could have got before the financial shock. They have lesser bargaining power now.

On the other hand, the people who can weather the shock have hit the jackpot. They can now pick up assets that have undergone no real change in value, at lower prices than before the financial crisis, enriching them further and raising up their financial shock factor higher.

In other words, right after a financial crisis, the rich get richer and the poor get poorer.

And our systems today are designed to take money from the poor (salaried taxpayers) and hand it over to the rich (banks, capital owners) right after a financial crisis.

This seems very wrong. And yet, this is exactly what happened in the US and will happen in any capitalistic society.

I've been reading some relevant topics to understand how this can be structured better to not end up in a situation like this, but there doesn't seem to be any easily workable alternatives out there.

Until we figure this out, we are at the mercy of the rich. Because, they are the ones making the rules. And they are the ones who can cause financial crises. What's to stop them from causing them deliberately if it is financially beneficial for them to do so?

As of today, nothing.

Scary times indeed.

Share this:

CONVERSATION

0 comments:

Post a Comment

Subscribe to my mailing list