Where does the term "FIRE" in "FIRE Economy" come from?
Economists often refer to different sectors of an economy by groups of economically related businesses. For example, businesses in the Manufacturing sector include Food Manufacturing, Apparel Manufacturing, Wood Product Manufacturing, Petroleum and Coal Products Manufacturing, Chemical Manufacturing, Fabricated Metal Product Manufacturing, and Computer and Electronic Product Manufacturing. The Finance, Insurance, and Real Estate or FIRE sector is composed of Commercial Banks, Savings & Loans, Credit Unions, Finance / Credit Companies, Securities & Investment, Venture Capital, Hedge Funds, Private Equity & Investment Firms, Insurance, Real Estate, Mortgage Bankers & Brokers Accountants.
What is the FIRE Economy?
The FIRE Economy is one of two economies that operate in the United States, the UK, and other countries that have developed economic policies to give FIRE industries tax, regulatory, and monetary, advantages over productive industries. The other economy is the Productive Economy, comprised of businesses that produce value-added goods and services. The Productive Economy grows based on profits from sales of goods and services produced by added intellectual property, energy, and other ongoing human value inputs. The FIRE Economy grows based on interest on debt and capital gains generated asset price increases, but not increased value -- asset price inflation -- realized as capital gains. Examples of inflated assets are residential and commercial real estate from 2002 to 2006 and technology stocks from 1997 to 2000. As a result, over a period of decades the FIRE Economy has become the dominant source of income, and payments within the FIRE Economy are now many times larger than the Productive Economy in aggregate.
How does the FIRE Economy effect me?
If you are in an industry that produces a good or service that is not dependent on rising asset prices, you are part of the Productive Economy.
If you work for a bank, real estate broker, or financial services firm
your income depends on interest on debt and rising asset prices, you work in the FIRE Economy. The FIRE Economy crowded out the Productive Economy from
1980 to 2008 by providing greater returns on capital invested in asset
price inflation and debt than investment in productive activities. However, with
the crash of the housing and then the stock markets from 2006 to 2008,
the FIRE Economy began to collapse. Unfortunately, the Productive Economy is not totally separate from the FIRE Economy but rather, as the diagram above shows, is enveloped by it. The collapse of the FIRE Economy is spilling over into what is left of the Productive Economy by reducing access to all forms of credit, not only those that inflate asset prices within the FIRE Economy but fund normal business operations such as lines of credit and automobile loans.
What is the future of the FIRE Economy?
The FIRE Economy in the US grew from 1980 to 2006, and began to collapse of the housing bubble in 2006 followed by the crash in securitized debt that financed the housing bubble in the US in early 2007, followed by the US banking system in 2008. A collapsing FIRE Economy is accompanied by debt deflation, falling demand, debt defaults, business failures, and rising unemployment. The Great Depression in the US in the 1930s is a famous example of a debt deflation that followed the collapse of a FIRE Economy. That debt deflation ended with WWII although it was moderated from 1934 to 1938 by the economic reflation policies of the FDR administration, including a on time 69% dollar devaluation and numerous fiscal stimulus programs. The outcome of the current debt deflation is forecast in Debt Deflation Bear Market Update Part I: 2009 Windup - Eric Janszen.
Bill Gross of PIMCO discussed the concept of an economy based on finance versus production using the term "Finance Based Economy" in 2006. Political commentator Kevin Phillips and economist Dr. Michael Hudson used the term "FIRE Economy" to describe a similar concept, also 2006. Hudson offers by far the most rigorous explanation of the FIRE Economy, such as in his 2006 article Saving, Asset-Price Inflation, and Debt-Induced Deflation.
Where can I learn more about the FIRE Economy?
The FIRE Economy is tracked by Finance and Economics site iTulip.com, founded in 1998.
