How Financialization is Destroying American Economy and Society
Casino capitalism, de-industrialization, predatory capitalism
SL KANTHAN
“Fugazi, fugayzi. It's a woozie. It's fairy dust. It’s not real.” That’s US economy!
Welcome to Geopolitics Demystified. I am your host S.L. Kanthan. Today, we talk about a very critical topic – how financialization has ruined the United States of America. This is also an important lesson for countries around the world, since many are misled into thinking that the way to become prosperous is to follow the US model.
The quote you heard about “fugazi” is from a scene in the movie Wolf of Wall Street where a veteran stockbroker explains the strategy for recommending stocks to customers. And that is also how the US economy works now. Somewhere along the way, the US forgot its own industrial past, and allowed the parasitic financial class to de-industrialize the country, destroy the free market, and create what can only be described as casino capitalism. Fueled by money-printing, unsustainable debt, massive fiscal and trade deficits, speculation and financial engineering, the American Empire superficially looks wealthy, but is actually teetering on the edge.
Three watershed moments
Paradoxically, the three global events that propelled American primacy would also be responsible for its eventual downfall. First, it was the famous Bretton Woods conference in 1944 and the devastation of WW2 that replaced the European empires with the American Empire, which immediately set out to dominate the world. However, this hubris led to humiliating failures in the Korean and Vietnam Wars. More importantly, the US was bankrupt in merely one generation after WW2. Thus, in 1971, the US went off the gold standard and defaulted on its financial obligations. Remember Richard Nixon’s famous speech – a.k.a the Nixon Shock -- in 1971 when he announced that the US would temporarily go off the gold standard? Well, of course, it was a permanent shift to fiat currency, since the US had run out of gold.
The second event that saved the US was the Saudi petrodollar deal, which rescued the US dollar from demise and re-established the greenback as the world’s reserve currency. On the flip side, this was akin to giving a teenager a platinum credit card with no limit. Excited by the possibility of immense and constantly growing demand for the dollar, America’s politicians went on a borrowing binge. The US debt-to-GDP ratio doubled between 1980 and 1992 – from 30% to 60%. Wall Street also loved free money and deregulation, which led to a spectacular boom in the 1980s and a crash in 1987. The 1980s also laid the foundation for outsourcing, de-industrialization of US economy, stock buybacks, hostile takeovers, vulture capitalism obsessed with profits for shareholders, and exotic tools such as derivatives. Then, we saw the dot com boom which went bust in 2001… followed by the real estate bubble, which burst in 2008. The COVID pandemic was a great coverup for the same boom-bust cycle. Since COVID, US debt has gone up by a staggering $12 trillion, but nobody can really tell you where that money went – it certainly didn’t go into the pockets of middle-class Americans.
The third event that was the last nail on the coffin was ironically the fall of the Soviet Union. This led to the birth of the unipolar moment, which in turn sparked uncontrolled hubris among globalists, banksters, corporate overlords, neocons and the military industrial complex. The irrational exuberance inside the American echo chamber led to prodigious outsourcing of manufacturing, the dot-com bubble, disastrous multi trillion-dollar wars in the Middle East, and a real-estate bubble which ended in a global financial crisis spawned by banks and Wall Street shysters.
What are the consequences of financialization?
Income and Wealth Inequality
First, Americans stopped worrying about fiscal discipline and embraced debt wholeheartedly. The US government has a debt of $35 trillion and, for the first time, the interest payment alone has exceeded the spending on military. American families and corporations have racked up another $32 trillion of debt. However, the biggest debtor in the history of mankind shamelessly claims that it’s the wealthiest.
Meanwhile, 2 in 3 Americans are living paycheck to paycheck, since the real wages – adjusted for inflation – of the average American has remained stagnant for four decades. Look at the wage increases for different groups of American between 1979 and 2019:
· Top 0.1% -- wages grew 375%
· Top 1% -- wages grew 160%
· Middle Class – wages grew 14%
· Bottom 10% -- wages grew 3%
From 1945 through the 70s, a typical American family could own a home, a car, and all the essentials with one wage earner, the husband. Now, in most families, both the husband and the wife must work to make the ends meet.
The wealth inequality in the US is staggering -- the top 10% of Americans have nearly 70% of the wealth, while the bottom 50% are left with just 3% of the nation’s wealth. If you include debts such as car loans, student loans, and credit card debt, the net wealth of many Americans will be negative.
Poverty is so bad that Americans are stealing electrical wiring from street lights, internet cables, and other public properties all across the country. In Los Angeles, people are stealing fire hydrants!
This Neo-feudalism is sold to the masses as freedom and democracy.
Poverty and inequality are mostly taboo topics in the US, where the society is taught to blame the poor. Thus, even though homelessness and drug addiction are at record levels, there is no debate about the fundamental economic system.
Casino Capitalism
Las Vegas is a very popular destination because it is a Sin City that clouds people’s judgments. Although vast majority of people end up losing money, they gamble hopefully, because the few winners are always loud. And Vegas offers plenty of cheap drinks to drown the sorrow of losers.
Well, the US economy is modeled after Vegas.
The only way to accumulate wealth in America is through speculation – mostly in real estate and stocks. And just like in Vegas, for every winner, there are many more losers. The stock market crashes periodically, but there is no choice but to participate in it, since American wages do not allow people to save steadily. And, just like Vegas, the “house always wins.”
In the stock market, insiders engage in pump-and-dump. Consider Tesla stock: Starting in March 2020, it went up 8-fold within a year, making millionaires and the billionaires a lot wealthier. However, the stock has lost half its value in the last year. Guess who was the sucker? The average investor, who buys high and sells low, since he hears all the hype close to the peak.
But a sucker is born every minute. The latest hype is Nvidia, which has a market cap of mind-boggling $3.3 trillion – India’s GDP in 2022. Nvidia’s profit is only $30 billion. In a logical world, this valuation means that it would take more than 100 years to recoup the investment. So, why would anyone buy Nvidia shares? In the hope that the stock price would keep going up.
But such absurdity is celebrated in the US mainstream culture. The Netherlands had the Tulip Mania in the 17th century; the US has non-stop mania or irrational exuberance.
There is also plenty of financial engineering. Stock buybacks used to be illegal until the 1980s. But now, US corporations spend almost $1 trillion a year buying back their own shares, artificially boosting the stock price. Many corporations even borrow money to use for the buyback programs. Thus, when the US boasts that its stock market is worth $50 trillion, it’s nothing but “fugazi.”
Corporate CEOs and the large shareholders such as BlackRock do not care about investing in production, research, technology or the employees. Instead, the priorities are stock prices and dividends. This is why the US is losing to China, which now leads in 37 out of 44 critical technologies.
The other option in the American casino is the real estate, which also goes through boom-and-bust cycles. When the market collapses, giant private equity firms like Blackstone swoop in and buy homes at a great discount. By 2030, corporate landlords will be owning 40% of the rental homes in the US.
As the World Economic Forum said, “You will own nothing and be happy.” Although, they are wrong about the second part – Americans are very depressed and rank #1 in global statistics for consumption of antidepressants and other psychotropic medications. The market for illegal drugs in the US is $150 billion a year. The suicide rate in the US has also skyrocketed to the highest level since the Great Depression.
Sociologists have a special term for what’s happening in the US: Deaths of Despair. In terms of life expectancy, communist China has now surpassed capitalist USA.
Financialize Everything
Financialization is the cancer that is eating away at the US economy. Interestingly, the great economists in America have not really analyzed this fatal phenomenon. I have thought a lot about it and have come up with four different ways that the economy gets financialized.
1. Eliminating industries that are less profitable
2. Transforming normal economic sectors into speculative ones
3. Transforming normal economic sectors into extractive ones
4. Creating destructive industries
Let’s dive in.
Eliminating industries that are less profitable:
This is the foundation of outsourcing and deindustrialization that really took off in the 1980s as American corporations became extremely greedy and forgot their duties to the country. “Greed is good” became the mantra. The first target was manufacturing, which is very capital-intensive and labor-intensive. Why build massive factories and deal with the headache of managing workers? Moreover, why pay high wages and provide all sorts of benefits to blue-collar workers when people in developing nations could do the same work for fraction of the cost?
Many Americans would be astonished to learn that a century ago, the US’ share of global steel production was 40%. It is now merely 4%, while China accounts for 54%. Similar American decline can be observed in every category of manufacturing, thanks to the warped ideology of financialization.
The same calamitous philosophy is also applied towards infrastructure, which has very low profit margins. What is the return on investment (ROI) on bridges, railways, subways etc. compared to stock market manipulation? Insignificant. That is why the US infrastructure has been crumbling for years. In New York City, the cradle of Wall Street, the metro system looks like a fourth-world country with decades-old trains, decaying subway stations with trash and rats, and homeless people sleeping in the trains. There are more than 40,000 structurally deficient bridges in the US… 1000+ train accidents every year… one-third of Americans are exposed to arsenic, lead and toxic chemicals in the tap water… but the US would rather waste billions of dollars in wars in Ukraine and elsewhere.
Starting in the 1980s, US corporations started shipping jobs abroad, especially to Asia, which had plenty of diligent and cheap workers. Initially, US firms employed sweatshops to make the likes of Nike shoes, Gap shirts and Gucci bags. However, Asian countries were quick learners – especially China – and were able to climb up the value chain and manufacture more complex goods. Then, as the wages rose, those countries also became more efficient and productive, thus maintaining high profits for Western firms.
This exploitation scheme was working well until 2010 when China became the world’s largest manufacturing nation, displacing the US, which had held that title for the previous century! Then a decade later, China’s manufacturing value added was 75% larger than that of the US. More importantly, China was making its own intermediary goods and hi-tech products. Now, China’s industrial capacity is much larger than the US in virtually every manufacturing sector -- 10x larger in steel production, 250x larger in shipbuilding capacity and so on.
Now, when Boeing needs to build a plane, they need to rely on Russia or China for special titanium; when Raytheon and Lockheed Martin make missiles and fighter jets, they depend on thousands of Chinese suppliers; American pharmaceutical firms and hospitals need raw materials and medicines – including antibiotics - from China; and America’s largest corporations such as Walmart, Apple and Tesla will not survive without Chinese labor, goods and market. For example, half of Tesla cars globally are made in Shanghai and a third of Teslas are sold in China.
The US is in a terrible predicament. Since Trump’s election in 2016, Americans have found out how hard it is to fix the manufacturing gap. They have not been able to bring back the jobs; and they have not been to find any other country as skilled and efficient like China. Thus, US politicians and think tanks have been playing with creative phrases such as re-shoring, friend-shoring, China plus one, and de-risking. However, all these have remained empty slogans for the most part. Last year, the US imported $430 billion of goods from China – almost the same as in 2016, when Trump got elected.
Transforming normal economic sectors into speculative ones
In a real economy, the society would focus on production of tangible and beneficial goods in abundance. There would be emphasis on manufacturing, infrastructure and development. However, in an economy consumed by financial capitalism, speculation reigns as the driving force.
For example, rather than building more homes and making them affordable, the financial overlords prefer to keep the supply of homes low. Scarcity means higher value. Then, the entire real estate can be turned into a game of betting. For example, someone can buy a home and sell it the next year to make $100,000 of profit. While get-rich-quick gimmicks are tempting, they result in a hollowed-out economy and a delusional society that create “nothingburgers.”
Transforming normal economic sectors into extractive ones
The third and more pernicious form of financial capitalism involves fostering extractive or predatory sectors.
Take, for example, higher education. Young Americans now owe a whopping $1.8 trillion is student debt. College education in the US costs 4 times more today than 40 years ago — even after adjusted for inflation. Is education 4 times better now than before? Are kids learning 4 times more? Do college graduates earn 4 times more? No, no, no.
Similarly, healthcare cost in the US has risen from 6% of GDP in 1970 to 18% of GDP now. But Americans are much fatter and much sicker today than fifty years ago. Numerous chronic diseases like diabetes, obesity, autism, allergies, immune disorders, and cancer have skyrocketed over the decades. Obesity rate tripled from 15% to 45% over the last 40 years. Also, heart disease has been the #1 killer for a century but the great scientific minds cannot figure out a solution. In a financialized economy, sickness is a wonderful opportunity. As a Goldman Sachs analyst pondered in a biotech research report, “Is curing patients a sustainable business model?”
In predatory capitalism, providing affordable college education is a terrible idea; and preventive healthcare – especially using food, natural cures and holistic medicine – is an unforgivable financial sin.
Creating destructive industries
This is the most heinous consequence of financial capitalism, which creates disease, death and destruction for profit.
The military industrial complex is the prime example. Rather than focusing on peace, diplomacy and development, the “defense” contractors lobby politicians and bribe the media to promote perpetual wars. We can see how the US uses NATO to wage war against Russia, rather than seeking diplomatic solutions to end the conflict in Ukraine. Now, NATO has started demonizing China, laying the groundwork for a future catastrophic war in Asia.
The food industry and Big Pharma are two other notable criminals. The junk food industry is a colossal industry that makes billions of people sick; and Big Pharma sells numerous multibillion-dollar drugs based on exaggerated claims from rigged clinical trials. Once you realize how food corporations and pharmaceutical corporations are owned by the same financial masters – like Blackrock and Vanguard – you can see the racket – i.e., making people sick and then hooking them on lifelong medications.
In the 1960s, the sugar industry bribed researchers at Harvard University to blame saturated fat for heart disease; and companies like Coca Cola still fund scientists to “debunk” links between sugar and obesity. One of the scientists paid by the sugar industry went on to become the head of nutrition at the United States Department of Agriculture, where he helped write the dietary guidelines. The entire nutrition science is corrupted by Big Agri, Big Food and Big Pharma.
America’s mainstream corporate media has also forgotten journalism and truth. Instead, it embraces propaganda to protect its cronies in the government and other giant corporations; and the media spreads fake news and sensationalism to generate revenue from clicks.
Finally, even American politics has been financialized, resulting in every politician being on sale for various lobbying groups. US politicians represent the oligarchs, interest groups and corporations… not the American public. If you are an American and want to meet with your congressman or Senator, it is impossible, unless you write a check for, say, $10,000. Then you can get a 10-min meeting with him or her. If you want to have a personal 1-1 dinner with the politician, give him $100,000.
Conclusion
Driven by greed, hubris and an inflated sense of exceptionalism, the financial overlords of the United States of America forgot the fundamentals of economics, politics and statecraft.
Once upon a time, the political and business leaders of the US understood the importance of industries, production, infrastructure and, more importantly, the contract between the rulers and the masses. However, with financialization of the US economy, the oligarchs created a predatory capitalist system that has been devouring the American society for the past few decades. Unfortunately, there is no easy path for the US to revert back to an industrial economy now.
Rather than building a sustainable and resilient system, US elites have created an Empire that depends on the exploitation of the rest of the world. However, this parasitic model has reached its expiry date, as the Global South is architecting a new paradigm for a multipolar world order. The implosion of the American economic and political system will be not only painful but also dangerous to itself and the rest of humanity. Managing the collapse of the US empire will be a monumental challenge for Russia, China, India and others in BRICS+ over the next decade.
--- S.L. Kanthan
Follow me on Twitter: @Kanthan2030 and YouTube: Geopolitics Demystified
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