Last week, I received an email from Apple Store stating that I could trade in my iPhone 7 plus to one of the newest phones. The iPhone Xs that I was interested in cost about 750 dollars; however, I could buy it for $31 per month for 24 months. All the sudden, although the price of the phone stays the same, it becomes a lot more affordable to me–that’s financialization. That instant illusion of affordability is killing the middle-class earners.
Thomas Palley defines financialization as the process whereby financial markets, financial institutions, and business elites gain more significant influence over economic policy and economic outcomes.
Mr. Palley classifies financialization’s significant impact as:
- Elevate the significance of the financial sector relative to the real sector.
- Transfer income from the real sector to the financial sector.
- Increase income inequality and contribute to wage stagnation.
Although all three impacts are mutually exclusive and detrimental to the macroeconomy, transferring income from the real sector to the financial industry is the most visible to middle-class earners and below.
Apple or a third-party lender was ready to lend me 800 dollars at zero percent interest for 24 months to buy its expensive smartphone. Apple is far from being the first company to provide consumers loans to finance its products. General Electric, car manufacturers, and other retail companies have been doing the same thing for decades. However, this type of company or third-party financing for day-to-day products is widely available.
The 800-hundred-dollar iPhone was/is an expensive product even after the monthly payment was made available to me. Too many of us fail to realize that undeniable fact. Moreover, companies from Apple to car manufacturers are aware of our shopping habits. They know that we shop for monthly payments on most products we buy. So, they feel free to raise their price and structure monthly payments that we find affordable.
The following are examples of companies and industries using financialization to increase revenues: Car manufacturers increase their manufacturer suggested retail price (MSRP) and prolong maturity date up to 84 months, phone companies increase the price of their smartphones and sell us on the monthly payments, and company like Blue Rhino let us pay the security deposit on our new place every month. Everything seems affordable when nothing is. That illusion of affordability often gets middle-class earners in trouble when their hours got cut, got laid off, or had a financial emergency.
Predatory financing–the offer from Apple was, at least, zero percent financing for 24 months. However, most third-party lenders that provide financing for day-to-day products charge high-interest rate. Using high-interest rate financing to procure expensive products is the ultimate middle-class sin.
Overpriced consumer products combined with predatory financing to buy those products are transferring most, if not all, middle-class’ disposable income to the financial elites. So that transfer stays in the financial sector in the form of financial assets such as stocks and bonds. In essence, making money from money, which does not have the same economic multiplier as engineered products
