The New Capitalism
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“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. Of course, capitalism is prone to New Eras, as Wolf notes. 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 then it sinks.
Mr. Wolf maintains that the financial world is much more financial and worldly than it used to be. The old model focused on economic output. The new one 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 – more than tripled in the 25 years to 2005. Europe, a bit slow to get in on the trend, now has capital assets worth 303% of its GDP. For the UK, the figure is 359%, and for the USA it is over 400%.
Today’s most successful capitalists earn money not from producing things, but by financing capital transactions. 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. Take hedge funds and private-equity funds. In 1990, there were fewer than 1,000 hedge funds; today there are thought to be more than 9,000. Derivatives barely existed 20 years ago. In 1987, the total notional amount of interest rate and currency swaps was roughly zero. Today, it is about $300trn, according to the International Swaps and Derivatives Association.
This new capitalism is also more cosmopolitan. Companies are often multi-national. Hedge funds and private-equity groups take money from anyone. Deals cut across borders faster than illegal immigrants. And big investors go wherever the money is good. So the whole world can get into the game. The Chinese won-ton maker, the Indian sari seller, the Colombian drug dealer – everyone can enter the great casino.
But what is it, really, that makes this New Capitalism new? Mr. Wolf does not say so, but the main new ingredient is new money itself. On August 15, 1971, Richard Nixon “closed the gold window” at the US Treasury. Previously, the world’s money system was founded on gold. No currency could float too high, because the gravity of gold would pull 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. But what would the dollar look to? With nothing to hold it back, it slowly took off!
The US puts out, effectively, as much paper money as it can get away with. The last thing any nation wants is a rising currency; it would put it at a commercial disadvantage. So foreign central banks want to avoid a falling dollar in the worst possible way – by increasing the quantity of their own currencies. More dollars, more yuan, more yen, more Swiss
francs, more euros, more pounds. More bonds. More derivatives. More debt. More speculation. As long as foreigners give each new dollar the same warm reception as the last, the dollars keep arriving. And now, the whole world floats on a sea of liquidity. Look at almost any stockmarket on the planet. You will see an upward bend to it. Property too – especially in market centres, such as New York, Hong Kong and London – has gone up. Some items – such as art, watches, yachts, and executive jets – have seen even steeper growth. Just this week, a painting of Waterloo Bridge by Claude Monet sold for twice what experts had expected – £17.9m. This week will probably be the biggest in art history – with more money changing hands than ever before. And much of the money comes, naturally, from hedge funds!
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 that they have no free cash to buy anything. In the ten years 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%. New Capitalism has a perverse side to it. But don’t worry; it is no more permanent than the capitalism it replaced.
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