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What is the Paper Economy?

Ken Black
Ken Black

The paper economy generally refers to markets in which the value of assets are traded on paper, rather than with the physical assets themselves changing hands. Often, those trading the assets have no intention of ever taking possession of the physical product. They are simply hoping to get the maximum profit out of the commodity before the contract comes due for delivery. Another use of the term paper economy involves an economy based on service-type jobs that do not produce a physical product, and therefore do not add much real value to the economy.

In the case of markets, most of the trading and profit realized is based on paper. If traders feel that a certain commodity will be more valuable when the time comes for that commodity to be delivered, they may buy under the anticipation that the contract will be worth more. This involves a great deal of risk because, at some point, the trader will need to sell the contract or take delivery of the product. This could lead to the trader taking a loss if the value of the product decreases.

Man climbing a rope
Man climbing a rope

The paper economy has been criticized in some cases for artificially inflating the value of a product. Oil is one of the prime examples of this. Many analysts feel the value of oil, when it is up or down, may not truly reflect market conditions as defined by supply and demand. Despite that alleged contradiction, traders determine the price of the contracts by buying and selling speculatively, without first-hand knowledge of the actual situation. In nearly all cases, traders do so without ever truly wanting the product being bought or sold.

The term paper economy may also hold true, to a certain extent, for stock exchanges around the world. Many times, those buying stock are not doing so because they truly may want an ownership stake in a particular country. Rather, they are simply trying to make a profit based on what companies they think will be increasing in value. What they are really doing is trading paper, which by default makes them owners in a company, albeit temporarily, whether that is their ultimate goal or not. They generally will never attend shareholder meetings or take an active interest in the company.

To a lesser extent, the term paper economy may apply to those who are in service-type jobs, such as secretaries and sales positions. These individuals do not produce a product, but simply take care of paperwork associated with more concrete transactions. Whether these positions are valuable depends on the company and the value it puts on them. Economies built more on services than products are generally considered to be weaker and more prone to economic downturns, though there are always exceptions since some services are inherently more valuable than others.

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