“We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism,” writes Martin Wolf in Tuesday’s Financial Times. Oh no! Not another New Era…we have seen so many already. Once we get the hang of one, along comes a new one and we have to start all over again.
Capitalism is prone to New Eras, as Wolf notes. Left to its own devices, it does to established institutions approximately what Sherman did to Atlanta. This New Capitalism, though, is different. It is unlike any other capitalism in every way – except the essential one. Like a drunken boat, it rocks and rolls on the great waves of money and politics…it drifts along with the market currents…gets blown this way and that by heaving gusts from mobs, manias and monetary madness and…and then…it sinks.
Mr. Wolf maintains that this New Capitalism is much more financial and much worldlier than the old one used to be. The old model of capitalism used to be focused on economic output. This new model concentrates on buying and selling the capital assets themselves. McKinsey Global Institute reports that the ratio of the latter to the former – that is, the value of capital assets to global GDP – has more than tripled in the quarter century ending 2005. Europe, a bit slow to get in on the trend, now has capital assets worth 303% of its GDP. For the U.K., the figure is 359%…and for the USA it is over 400%.
Today’s most successful capitalists tend to earn money not from producing things, but by financing capital transactions. Or, as Wolf says, “finance has become far more transactions-oriented.” Deals, deals, and more deals! There are more players in the financial world; they play harder; and they have more to play with – hedge funds and private equity funds, for one thing. In 1990, there were fewer than 1,000 hedge funds; today there are thought to be more than 9,000. And derivatives barely existed 20 years ago. In 1987, the total notional amount of interest rate and currency swaps was approximately zero. Today, including property derivatives, the total notional traded value is over $500 trillion, according to the International Swaps and Derivatives Association. That’s roughly ten times global GDP.
Another thing that is different about this capitalism is that it is more cosmopolitan than its predecessors. Companies are often multi-national. Many hedge funds and private equity groups will take money from anyone, regardless of what passport they hold. Deals tend to cut across borders faster than illegal immigrants. And big investors are rarely flag wavers; they’ll go where the money is good. So, now, the whole world can get into the game. The Chinese won-ton vendor…the Indian sari merchant…the Colombian drug dealer – everyone can now enter the great casino.
But what is it, really, that makes this New Capitalism new? Mr. Wolf does not mention it, but the main new ingredient is new money itself. On August 15, 1971, Richard Nixon “closed the gold window” at the U.S. Treasury. Previously, the world’s money system rested on a foundation of gold. No currency could float too high, because the gravity of the gold in the basement would bring it back down. But after 1971, capitalists had a very new money system to work with. Henceforth, the nations of the world would look to the dollar as a reference. And the dollar, what would it look to? The dollar looked left and looked right. Seeing nothing to hold it back, it slowly took off!
With no gold to restrain it, the United States puts out, effectively, as much paper money as it can get away with. And it can get away with plenty because the last thing any nation wants is for its own currency to rise against the dollar. Americans, after all, are the biggest spenders in the world. If a nation’s currency rises against the dollar, the price of its goods and services will rise too. And then, the Americans will buy from someone else. So every foreign central bank wants to avoid a falling dollar in the worst possible way – by increasing the quantity of its own currency!
In no time at all, the whole world is awash with more cash and credit than it knows what to do with. More dollars, more yuan, more yen, more Swiss francs, more euros, more pounds! More credit. More bonds. More derivatives. More debt. More speculation. As long as foreigners continue to give each new dollar the same warm reception they gave to the last one, the dollars will keep turning up. And now, the whole world is bobbing in a sea of liquidity. Look at practically any stock market on the planet. You will see a sharp upward bend to it. Property – especially in major market centers, such as New York, Hong Kong, and London – has gone up too. Things like art, watches, yachts, and executive airplanes have shown even steeper increases. Just this week, a painting of Waterloo Bridge by Claude Monet sold for twice what experts had expected – 17.9 million pounds. This week will probably be the biggest week in art history – with more money changing hands than ever before. And many of the buyers are, naturally, hedge funds managers!
While the few rich admire their Monets, the rest of us have to content ourselves with glossy prints, offered on Wednesday by The Daily Telegraph for free. Most people have no choice but to accept the paper’s generosity. New Capitalism has put them so deeply in debt, they have no free cash to buy anything. In the ten years up to 2005, UK households increased their debts from 108% to 159% of GDP. Americans’ debts went up by about as much – from 92% of GDP to 135%.
That’s the dark side of the financialized globe. But not to worry. One thing about the New Capitalism…it is no more permanent than the capitalism it replaced.
The Daily Reckoning Australia