The Great Divergence

[Zenda]

Could you give an example? Most of the esoteric financial instruments in use are pretty clear, based on real things, however much they're aggregated, shuffled, or disassembled. They're either someone's debt, sliced and diced and repackaged, or they're insurance against something happening (essentially, a bet), or they're options or obligations to buy or sell something or another at a future date. None of that should require a constant influx of capital, although most peoples' bets are strongly in favour of the economy growing (tough to be an investor if it isn't.)

Sorry for not getting back at this earlier, but other matters required too much of my attention. However, I still felt the obligation to give a (short) reply, even though this no longer seems a topic of interest.

Financial constructions are indeed like bets, but they are not always based on market fluctuations of actual goods. Historically, they might have been, but things have changed. Let's take futures, for example. In 1970, the futures market was largely dominated by agricultural products, with the rest being in precious metals. In 2004, that same market is for about 75% based on financial instruments (graph).

Also, I didn't mean to say that some outside influx of capital is required. Rather, it provides for that by itself. Trading in financial instruments is often done by arbitrage pricing mechanisms. This allows for making profits without dealing in actual goods, without risk, and even without initial investments on the deal.

arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit at zero cost.