Financialization And Globalization May Work Together

We have witnessed the growth and influence of the financial sector in developed economies. This article looks at a couple of explanations for the financialization of the economy. One hypothesis is the effect of globalization on the tradable goods sector. Countries that keep their currencies low relative to the dollar gain an advantage, and build their manufacturing industries at the expense of US manufacturing. That is why China and other developing countries continue to purchase US treasuries in order to keep their currencies low versus the dollar. The related hypothesis is that investors are willing to pay a premium for services which help them to find new opportunities for yield on their investments due to low interest rates. Low interest rates also create opportunities for leverage.

There does not seem to a single best answer that explains the growth of financialization during the "roaring 20's" in the US as well as the current period. The growth of profits in the financial sector does explain the growth in compensation in that sector. A relatively small number of employees share a large pool of profits.