Productive vs. Parasitic Investment

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Description

How the U.S. financial sytem contributes to the contraction cycle through parasitic investment, by Thornton Parker:

"There are two types of investments, productive and parasitic. Productive investments pay for buildings, research and development, tools, instruments, training, distribution facilities, transportation networks, energy systems, and all the knowledge and real world things that are needed to produce and deliver goods and services. Productive investments are unique, they often require long term commitments and are not easy to buy and sell. They are absolutely necessary for creating jobs on Main Street. They involve serious risks and their success is tied to the success of specific companies. Most productive investments are made by small companies and by public companies using cash they have borrowed or generated through operations. Except for helping with public offerings, Wall Street largely shuns productive investments that involve stock.

Parasitic investments just use money to make money by taking advantage of productive investments that others have already made. They do not require long term commitments and are traded like commodities, often in bulk. Wall Street promotes parasitic investments, and claims that their risks can be managed with modern portfolio theory and trading techniques, Much of the trading, however, is simply gambling that shifts risks and profits from one party to another without creating any real world value." (http://www.ethicalmarkets.com/2009/05/07/from-wall-street-bird-nests-to-main-street-growth-cycles/)


Productive investments can lead to a Growth Cycle; parasitic investments lead to a Contraction Cycle


More Information

  1. Growth Cycle vs. Contraction Cycle