The Connection Between Widening Wealth Gap and Financial Crises

Alright, let's talk about this topic.

You might think wealth inequality is just a social issue, concerning fairness and justice. But in reality, it's closely tied to each of our wallets, and even the financial security of an entire nation. These two things are like a dangerous dance pair; when the gap widens too much, it's particularly easy to trigger major problems like a financial crisis.

Why is this the case? We can understand it from three perspectives, and I'll try to keep it as simple as possible.

1. Most People Lack Funds for Consumption and Rely on Debt to Get By

Imagine a society where 1% of the population controls 90% of the wealth, and the remaining 99% share the other 10%.

• Limited Consumption by the Rich: The 1% rich have more money than they can spend. Today they buy a Ferrari, tomorrow a yacht, but their daily consumption is just a drop in the ocean compared to their enormous wealth. Most of their money ultimately gets saved or invested, rather than directly turning into consumer goods.
• The Poor and Middle Class Struggle: The remaining 99% experience slow or even stagnant income growth. Yet, they also want to live a "decent" life, perhaps buy a house, a car, or send their children to good schools. What to do? If income isn't enough, they can only borrow. Consequently, mortgages, car loans, credit card debts, and various online loans pile up higher and higher.

The result is: Society's overall demand is increasingly supported by debt, rather than by real income. This is like a foundation that should ideally be reinforced concrete (real income), but instead, much of it has been replaced by foam plastic (debt). It might look fine normally, but once there's a slight disturbance, like company layoffs or rising interest rates, many people can't repay their loans. The bubble "pops," banks are left with a pile of bad debts, and a financial crisis ensues. The 2008 subprime mortgage crisis in the US is the most classic example.

2. The Rich Have Too Much Money, Turning into "Hot Money" Seeking Risk

Now let's look at the 1% rich again. They have mountains of money that needs to find ways to "make money work for them."

• Capital Chases Profit: Ordinary investments, like bank deposits or government bonds, offer returns that are too low to satisfy their appetite. Consequently, this massive capital, like hungry wolves, scours the globe for high-risk, high-return prey.
• Financial Innovation (Playing with Fire): To cater to these wealthy patrons, clever financiers on Wall Street design increasingly complex and incomprehensible financial products (like the financial derivatives we often hear about). They package those high-risk mortgages and car loans mentioned earlier and resell them to these wealthy investors seeking high returns.

The result is: A large amount of "hot money" floods into areas like real estate and the stock market, inflating one massive asset bubble after another. Everyone revels in the euphoria of "constantly appreciating assets," but the underlying foundation of this bubble is precisely the debt of the poor and middle class. When the debt chain breaks, these seemingly sophisticated financial assets instantly become worthless, the bubble bursts, triggering an avalanche-like financial collapse.

3. The Rules of the Game Are Changed by the Wealthy

When wealth becomes highly concentrated, it's not just money; it also translates into immense political influence.

• Deregulation: The wealthy elite and large financial institutions have the means to spend heavily lobbying governments, pushing for the "loosening of restrictions" on the financial industry. They'll say: "Don't regulate us; let us compete freely, that's how we foster economic prosperity."
• The "Too Big to Fail" Illusion: With loosened regulations, banks and financial institutions begin to gamble more boldly. They figure that they are too large; if something goes wrong, the government will surely step in to rescue them to prevent the entire system from collapsing.

The result is: The entire financial system is encouraged to take risks. The lack of regulation and the "too big to fail" expectation sow the deepest seeds for a crisis. When a crisis truly erupts, it's often the entire taxpaying public (including the poor who had no money to begin with) who end up footing the bill for this capitalist gamble.

In Summary

So, you see, widening wealth inequality and financial crises are linked in this way:

It burdens the poor with increasing debt, forming an unstable economic foundation; simultaneously, it puts more and more "hot money" into the hands of the rich, leading to high-risk speculation and inflating asset bubbles. Finally, it can also influence policy, dismantling the "firewalls" that should protect us.

To use an analogy, the entire economy is like a tall building. Widening wealth inequality is akin to progressively thinning out the building's foundation (the majority of ordinary people), while simultaneously adding extravagant and heavy sky gardens (financial speculation) on the rooftop (a few wealthy individuals).

Can such a building not be dangerous?