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What is a FIRE Economy?

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  • Written By: Emma G.
  • Edited By: Melissa Wiley
  • Last Modified Date: 03 November 2016
  • Copyright Protected:
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Economists refer to the finance, insurance, and real estate sectors as the FIRE economy. This economy is based on finance, meaning it makes its money by collecting interest on debts and through other non-production related sources. Banks, insurance companies, and real estate companies are all part of this economy. A FIRE economy grows out of financialization, the tendency of complex economic system to express all tradable resources, goods, and services as monetary values. This allows unlike goods to be traded with ease because their value is known.

The FIRE economy is one of two economic classifications that operate in countries with developed economic policies, including the United Kingdom, the United States, and Canada. The other economic classification is the productive ceonomy. It includes business that produce tangible goods or services. The productive economy relies on the trade of labor and goods to make money.

In any country with a FIRE economy, the FIRE and production economies affect each other. Gains or losses in this type of economy tend to cause similar situations in the production economy. For example, when interest rates, which are governed by the finance sector, are low, consumers can borrow more. Having more credit allows consumers to buy more of the goods and services offered by the production economy. In this situation, the strength of one economy also strengthens the other.

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Like any economy, a FIRE economy is a delicate system. Small changes can cause a ripple of drastic effects throughout the system. In 2006, the FIRE economy in the U.S. began to collapse with the burst of the housing bubble. Many Americans suddenly found that their homes were worth much less than they thought. This led to a crash in the banking system, resulting in debt defaults, failing businesses, and rising unemployment as the problems of the FIRE economy overflowed into the production economy.

Some outspoken economists and pundits have criticized the FIRE economy for its effect on the production economy. They argue that any economy based purely on debt, interest, and stocks is not necessary. It is a construct designed to allow people to make money without the labor or resources that would normally be required. They often point out that such an economy is always teetering on the edge of financial disaster as long as the price of goods depends, not on supply and demand, but on the success of the stock market.

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