Key Points:
- Advanced economies have experienced a slowdown or stagnation in the past two decades.
- GDP growth rates have decreased, and GDP-per-capita growth has declined even further.
- Former US Treasury secretary Larry Summers described this slowdown as “secular stagnation”.
- Factors contributing to this lethargic growth include an aging population, rising inequality, and automation.
- In reaction to this slowdown, capitalism has evolved, leading to the rise of financial capitalism.
Advanced economies, particularly in North America and Europe, have experienced a noticeable slowdown or even stagnation in recent years. Real inflation-adjusted GDP compound annual growth rates (CAGR) in the United States, for example, have decreased from an average of 4.2% and 4.5% in the 1950s and 1960s to approximately 3.2% in the following decades. From 2000 through 2020, the CAGR dropped even further to 1.8%. In terms of GDP-per-capita, the decline is even bleaker, with the average CAGR falling from 3.2% in the 1960s to just 1% from 2000 through 2020.
In a speech given eight years ago, former US Treasury secretary Larry Summers characterized the growth preceding the global financial crisis as an illusion and suggested that the economy may be experiencing a period of “secular stagnation.” The exact causes of this stagnation are complex and multifaceted, including an aging population, rising inequality, and the impact of automation on wages.
The slowdown of economic growth has prompted a transformation in capitalism itself. Partly in response to this sluggish growth, capitalism has evolved into what is known as financial capitalism.
Financial Capitalism – A Deregulated Model
Financial capitalism, as a variation of capitalism, has its roots in the early 1970s. On August 15, 1971, President Richard Nixon announced that the United States would unpeg the dollar from gold, marking a significant shift away from the centralized and regulated financial system of the Bretton Woods era. This move towards deregulation and financial innovation paved the way for the development of synthetic derivatives, futures contracts, and other financial instruments.
Over time, financialization has become increasingly prominent, with the over-the-counter and exchange-traded derivatives market reaching almost $800 trillion by 2011. This trend has been accompanied by the rise of securitization, including the introduction of mortgage-backed securities (MBS) and collateralized debt obligations (CDOs).
The Role of Credit in Financial Capitalism
Credit has emerged as a central driver of wealth accumulation in financial capitalism. Access to credit has become widespread, enabling consumers, corporations, and governments to fund consumption and investment activities. Debt has overtaken equity as the primary source of capital accumulation, with credit becoming a new commodity in the economy.
Financial intermediaries, such as banks, insurers, and hedge funds, play a critical role in financial capitalism. These intermediaries manage and invest other people’s money, generating profits through various fees and transactions. Wealth accumulation in financial capitalism is transaction-based rather than primarily operational, with credit amplifying the value of these transactions.
Financial Capitalism and Value Creation
In financial capitalism, value creation is driven by two main factors: credit and fees. Financial markets rely on these two sources to generate wealth. The accumulation of capital occurs through a combination of financial engineering, operational improvements, and the extraction of fees.
This model favors short-term investors, such as private equity firms, who focus on dynamic and opportunistic strategies to accumulate capital. It is often criticized for prioritizing transactional gains over long-term shareholder value. The unrestricted liquidity and prevalence of credit in financial capitalism have transformed the way wealth is created and allocated in the economy.
In summary, financial capitalism has emerged as a modern variation of capitalism in response to the slowdown in economic growth. Credit and the proliferation of financial intermediaries have become integral to wealth accumulation in this model, with transactional activities and fees playing a central role. However, the concept of maximizing long-term shareholder returns still exists in the digital capitalism model, which will be explored in Part 3.
