This you know:
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| Graph #1: Debt-to-GDP, 1946-2020 |
Dunno about you, but I want to know two things: What happens next?
And what happened before.
I can't answer the first question. I can tell you that my guide to understanding what's going to happen is the cycle of civilization: "Civilizations die by suicide" and all that.
This post addresses the second question.
The debt data comes from A neverending debt trap
by Steve Keen, from 2013. I looked at it some years back, and even some years before that. But it took me till now to look at it as debt-to-GDP.
The GDP data is from Measuringworth.
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| Graph #2: Debt-to-GDP, 1834-2020 |
One could ask: When did financialization start? The 1980s? The '70s? The '60s? I don't think so. The Civil War? Maybe.
One could quote Benjamin Friedman from 1986:
One of the most striking features of the U.S. financial system during the post-World War II era -- but not since 1980 -- has been the stable relationship between debt and economic activity... Moreover, except for the depression of the 1930's, the debt ratio was also fairly stable, and trendless, during the pre-war period extending as far back into the nineteenth century as available data permit.
Stable and "trendless" before 1980? No. Before the Great Inflation of the 1960s and '70s, there is a persistent upward trend going back almost to the start of the graph.
Friedman's assertion is backed up by the supporting evidence of this footnote:
See Friedman (1980, 1982) and Goldsmith (1985).Evidence? References are not evidence. References only create the appearance of evidence. Eh, but I looked. In the first of those three references, Friedman writes:
Throughout their history, but more so during the twentieth century and especially in the years since World War II, the American financial markets have undergone a shift away from direct transactions between nonfinancial borrowers and lenders toward the intervention of financial intermediaries.
That sounds to me like an example of increasingly greater financialization. Friedman says this was occurring throughout the history of American financial markets. Since the beginning.
I do not see that the statement from Friedman (1980) supports the view
that financialization and/or the debt ratio were "trendless". There was persistent increase in all aspects of finance, at least since the Civil War, and no doubt since the inception of the financial markets.
3 comments:
Below Graph #2 I wrote:
"One could ask: When did financialization start? The 1980s? The '70s? The '60s? I don't think so. The Civil War? Maybe."
As I noted before, in his 1961 book The Evolution of Civilizations, Carroll Quigley said:
"The Civil War has commanded major attention, but there is little recognition of the real significance of this war; namely, that after giving an impetus to industrialization, it left a residue of emotional patterns that alienated the farmers of the South and the farmers of the West so that the country could be dominated politically by the high finance and heavy industry of the East."
For 100 years before Quigley wrote, finance grew, financial cost grew, and debt increased near three-fold -- from half the size of GDP to almost 1.5 times the size of GDP.
In the 60 years since Quigley wrote, debt has doubled, and is now near 3 times the size of GDP.
And that is not ALL debt, but only the nonfinancial debt.
When did financialization begin?
I don't usually turn to David Graeber for evidence, but this time I will quote from Debt: The First 5,000 Years. From the Conclusion:
'True, earlier figures like Adam Smith and David Ricardo were suspicious of credit systems, but already by the mid-nineteenth century, economists who concerned themselves with such matters were largely in the business of trying to demonstrate that, despite appearances, the banking system really was profoundly democratic. One of the more common arguments was that it was really a way of funneling resources from the "idle rich," who, too unimaginative to do the work of investing their own money, entrusted it to others, to the " industrious poor" -- who had the energy and initiative to produce new wealth.'
Already, by the mid-19th century Graeber says, there were stories circulating designed to expand and enhance finance.
When did financialization begin? At or before the mid-nineteenth century, according to Graeber. Yeah, I buy that.
Chris Dillow links to the Michael Roberts post "Theft or exploitation?- a review of Stolen by Grace Blakeley".
Roberts writes: "Minsky was right that the financial sector is inherently unstable and the massive growth in debt in the last 40 years increases that vulnerability – Marx made that point 150 years ago in Capital."
I quote that because, taking Roberts at his word, Karl Marx gave an early warning about financialization. If he gave that warning in Volume I of Capital, the date was 1867.
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I couldn't read Capital. It was like trying to read German (even in the English translation) and I cannot read German. I'm also having trouble with the Roberts post: Roberts seems to insist that Grace Blakely is wrong because she doesn't bow (curtsy?) to Marx's concept of exploitation. Roberts judges Blakely's book by its cover:
"Just take the title of Blakeley’s book: “Stolen”. It’s a catchy title for a book. But it implies that the owners of capital, specifically finance capital, are thieves. They have ‘stolen’ the wealth produced by others; or they have ‘extracted’ wealth from those who created it. This is profits without exploitation."
I have trouble with the concept of exploitation. I'm with Adam Smith (Wealth of Nations, Book I, Chapter 6) who looked at the component parts of prices and saw wages as the payment to the employee and profits as the payment to the employer. The concept of exploitation requires us to think that if the worker not only made his product but also sold it, he would be better off. Dunno about anyone else, but if I depended on myself to sell my own product, I would have starved to death long ago.
Hey, if you want to think of it as exploitation, I'm not stopping you. I'm just saying that to move logically from either Marx's exploitation or Smith's profits, to financialization, should not present conceptual difficulties. You could even say that financialization is the exploitation of those who profit by exploitation (along with those of us who don't).
Also, I think Roberts is wrong to call the profits of financialization "profits". It is probably correct to call it "economic rent" but I find that term confusing. I just call it "interest" -- profit from the lending of money.
Dillow links to the Robert essay more than once, so I had to read the thing.
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