What Happens When the Highest Return Makes Nothing?

Economists note that one of the precipitating factors leading to the Great Depression was the simple fact that investors could make a better return on their investment investing in the stock market than investing it anywhere else. Capital for the production of real things simply dried up. Corporations, which might have redirected such investments to productive ends, simply plowed these investments . . . back into the market. Money became more valuable than things.

As money flowed into the United States and the dollar, investors unloaded other currencies. European governments facing a sell-off on the foreign exchanges responded as usual, raising interest rates and imposing austerity.

One of the consequences of the financial instruments created in the 1980s was that investors could realize higher returns investing in financial institutions than in the production of goods. How might the current deregulated financial environment mirror economic circumstances that prevailed in the 1920s?

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