What is the FIRE Economy?
Official FIRE Economy site

Where does the term "FIRE" in "FIRE Economy" come from?


Economists refer to different sectors of an economy by groups of economically related businesses. For example, the Manufacturing sector includes Food Manufacturing, Apparel Manufacturing, Wood Product Manufacturing, Petroleum and Coal Products 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 developed economic policies that give FIRE industries tax, regulatory, and monetary policy advantages over productive industries. The other economy is the Productive Economy that is 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 adding intellectual property and other human value inputs. The FIRE Economy operates by extracting economic rents, such as interest on debt, from the rest of the economy.

Wealth is generated in the Productive Economy by the accumulation of equity value and in the FIRE Economy from economic rents and capital gains generated asset price inflation without an increase in value. Examples of asset price inflation periods in the US are technology stocks from 1998 to 2000 and residential and commercial real estate from 2002 to 2006. Over a period of decades the FIRE Economy has become a dominant source of income in the United States. The total sum of payments within the FIRE Economy are now many times larger than in the Productive Economy.

How does the FIRE Economy impact all of us?

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 interest on debt than investment in productive enterprise. 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, 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 consumer and business access to all forms of credit, not only those that inflate asset prices within the FIRE Economy but those that 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 disintegrate with the collapse of the housing bubble in 2006 followed in in early 2007 by the crash in the market for securitized debt that financed the housing bubble in the US, 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 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.


 


Who originated the concept of the FIRE Economy?

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.



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