• Financialisation – Secular Stagnation – Neoliberal Austerity

  • By Joachim Bischoff | 09 Feb 16
  • The political, social, and cultural upheavals of recent decades can be understood as aspects of an epochal transformation of capitalism. The social practice of regulated capitalism growing out of the catastrophes of the first half of the 20th century had different regional expressions. In the US, for example, economic regulation was used rather than nationalisation to control key sectors of the economy. The US approach was more market-oriented than the policies adopted in Europe and the developing countries, and this difference is reflected in the commonly used expressions ‘Rhenish capitalism’ and ‘Anglo-Saxon capitalism’.

    My basic hypothesis is that the revolutions in production typical of capitalist society with its continual social convulsions – the increasing insecurity that accompanies this ever more hectic dynamic – and the dominance of the capital and financial market in recent decades, have been leading to a profound worldwide change in the social formation itself. The rise of finance-driven capitalism – also known as financialisation – poses new challenges for the trade-union-based left and the political left in terms of the control, social regulation, or embedding of financialisation and above all the strategising of alternatives to overcome it.

    There are differing views on the periodisation of capitalism’s historical development.[1] Following Kocka and Merkel, we can look at different types of capitalism according to the relation of market and state.[2] Applying this criterion to the last two centuries, they identify three types:

    • Market-liberal capitalism as in most of the 19th century in Europe and North America, characterised by the dominance of the principle of competition between firms and by great reluctance to use state intervention in economic and social policy.

    • Organised capitalism: The main driving forces that led to an increasing organisation of capitalism were (a) capitalism’s internal need of coordination and regulation under changing technological-organisational conditions, and (b) the growing social unrest caused by an almost completely unregulated capitalism. […] The 20th century then saw two variants: liberal and social democratic, for example, in respectively the New Deal of the 1930s and 40s in the US and the social market economy of the Federal Republic of Germany and other European countries, or, still more, in the highly developed Keynesian-welfare-state capitalism in France and Scandinavia. […]

    • Neoliberal capitalism: […] A new phase of capitalism appeared, characterised by deregulation, privatisation, and the partial dismantling of the welfare state. With the rapid advance of globalisation, international financial capitalism became immensely more important, and socio­economic inequality began to grow again.[3]
    Neoliberal capitalism and the expansion of the financial sphere

    During the last few decades of the 20th century, the first signs of an interregnum began to appear: the characteristic combination of strong growth in productivity, the welfare state’s modification of the distribution of wealth, and the increasingly pluralist way of life now began to unravel. The waves of deregulation aimed against the Fordist welfare state have been occurring at a constantly accelerating tempo, and the question of ruling class ‘leadership’ has surfaced again. This interregnum has international dimensions, even if the core capitalist countries have been affected differently by its upheavals.

    In industrial production, changes are occurring in the organisation of the enterprise and of work, the structure of the social collective worker, the conditions of accumulation, and the political forms of regulation. Market-driven activity is penetrating all sectors of society, and a continually accelerated accumulation of financial capital is developing from the over-accumulation in the real economy. There is no consensus on whether the current restructuring processes still represent an accommodation to the crisis of Fordism or already point to a post-Fordist path of development. Nor is there consensus about the levels of the total social capital at which qualitative changes in the conditions of accumulation can be discerned.

    The expansion of credit

    The huge financial and economic crisis of 2007/2008, the consequences of which are still being felt, was triggered by the multi-year boom in the property and mortgage sector that ended with the collapse in housing prices. The Great Crisis beginning in 2008 revealed the long-term trend towards the financialisation of the whole economy. Everything was being financialised – from student loans and people’s homes to healthcare and insurance. The commodities exchanges have financialised energy and food, that is, turned them into financial products, and even public pensions were ultimately absorbed into the international system of loan capital. These dark clouds over many classes of assets portended the financial crisis.

    The expansion of capital is mediated through credit. Within certain limits, credit gives the individual capitalist absolute access to outside capital and the property of others, and consequently to external labour. Access to social capital, not their own capital, gives capitalists access to social labour. Capital itself, which one possesses in reality or simply in the mind of the public, becomes a mere basis for the superstructure of credit. All standards, all justifications that are more or less valid within the capitalist mode of production disappear at this point. What the speculative capitalist risks is social property, not his own. Successful or unsuccessful investments equally lead to the centralisation of capitals and thus to expropriation on the most enormous scale. However, expropriation within the capitalist system has contradictory forms; it appears as the appropriation of social property through the few, and through credit these few increasingly take on the appearance of fortune hunters.

    The ‘financialisation’ of the global capitalist economy – the expansion of the financial sector and the explosion of credit – has several causes. In the early stages of capitalism, credit was a rather subordinate factor in the circulation of the total social capital; now the credit system is an immense social mechanism for the centralisation of capital. The growing importance of hedge funds and investment companies in recent years underlines this development, as do the public debt and the transactions made by private households. This enormous importance of money capital and the credit system reflects the advanced age of capitalism as a social formation.

    Although this financialisation is an expression of a hugely transformed social mechanism, it does not represent an independent stage of development in the social formation that Marx defined as characterised by manufacture and large-scale industry, or, as we have known it, in 20th-century Fordism. Financial-market-driven capitalism is no new stage of development in the history of this social formation; this would require a more strongly developed social mode of operation.

    Debt sustainability is currently coming up against the limits of the system. The capitalist system is not stable, and the equilibrium of the system that theoretical economists have established is nothing more than a tendency in the process of development from one disequilbrium to the next. In this process the financial sector plays the main role. Credit is generated in the process of value creation; the long-term expansion of the credit system, combined with falling interest rates, is based on the underlying over-accumulation, and thus on the ‘savings glut’ – a term used by former chair of the US Federal Reserve Ben Bernanke to describe a backlog of savings for which there are insufficient opportunities for investments.

    If this movement of expansion comes up against limits – for instance, when there is a slight increase in interest rates due to overexpansion or to a shortage of money capital – then the prices of assets such as real-estate and equities fall, the income streams of households and enterprises dry up, and debtors can no longer service their debts. This is when a crisis breaks out, as happened in the second half of 2007 in the US.

    An exogenous shock is not needed for a crisis to break out; instability arises from the mechanisms inside the system, not from outside. The capitalist economy is not unstable because wars or the price of oil send it into shock; it is unstable because limits are inherent in the expansion of credit. There is no corrective for the two extremes of disequilibrium – a speculative boom or a process of deflationary debt liquidation. Booms feed themselves, while an economy in depression keeps spiralling downwards. The only way to stop these processes is through state intervention. In a depression, this means support through fiscal and monetary policy to stop the self-destructive, deflationary debt liquidation.

    Since the outbreak of the Great Crisis eight years ago, we have seen a plethora of its different phenomenal forms. Between phases of intensified contradictions calm returns to the financial markets and the social process of reproduction picks up, though not to the same extent in all countries. In contrast to what occurs in nothing more than a serious cyclical crisis, the point of departure of the structural crisis in many countries was a drastic price correction in the real-estate sectors due to non-performing mortgages. This led to a banking crisis and later a public debt and banking crisis. This avalanche of crises was accompanied in many countries by recession and then worries about a new downturn in the US as well as a hard landing for China’s economy.

    At the beginning of the 21st century, capitalist economies are confronted with a secular capital surplus and thus a global flood of ‘savings’ due to chronic over-accumulation. The expansive monetary policies of central banks are reproducing the polarisation between the stagnating real economy and the over-abundant levels of money-capital accumulation. In responding to the global crash of seven years ago, the central banks have shifted into crisis-management mode: led by the Fed, they have deployed an expansive monetary policy to do everything possible to prevent the markets from collapsing. But we now see that the central banks have become prisoners of their own bail-out policy.

    The next few years will be shaped by attempts to deal with, that is, clear up, the mountains of debt that have accumulated in the past. Private households will have to reduce their debt and countries consolidate their budgets. However, if investment levels and private consumption still sink then aggregate demand will be depressed. Debt forgiveness is a long process; all historical precedents indicate that it takes years. It began with the outbreak of the financial crisis in 2007 and we still have several more years of it ahead of us.

    Debt reduction and austerity

    Despite its dismal practical results, neoliberal austerity policy is still politically dominant and anchored in society.

    • Investors continue to buy bonds with low or even negative interest rates, as well as high-valued shares and overpriced property;

    • zero interest rates constitute a considerable anomaly in financial markets, particularly at times of exuberant levels of debt;

    • according to the Bank for International Settlements (BIS), debt in the twelve largest world economies has increased by 50 per cent since 2007. Similarly, McKinsey has calculated the debt increase in 47 countries at US$ 57 trillion over the same period. This makes their total debt around US$ 200 trillion, which means an increase of 20 percentage points to 290 per cent of GDP.

    The ongoing crisis in the Eurozone has led to serious social dislocations. Neoliberal ‘structural reforms’ in countries like Greece, Ireland, Portugal, and Spain have only aggravated the explosion of debt. For example, in 2011 Portugal, which had a socialist government at the time, negotiated an emergency loan of 78 billion euros with the ‘Troika’. The ‘adjustment programme’ had consequences: after three years of
    recession, GDP was supposed to grow again in 2013, but it only did so in 2014, and then by a mere 0.9 per cent. Economic output in the Eurozone as a whole has still not recovered to the pre-crisis level of 2007. Deficit reduction is still being enforced, and Portugal, for example, is to reach a budget surplus of 0.2 per cent of GDP in 2019. Moreover, besides its deficit ratio, Portugal’s public debt now amounts to 129 per cent of GDP. As convincing prospects for economic restructuring are nowhere to be seen, there is considerable doubt about the country’s debt sustainability.

    Overall, it would be hard to describe the neoliberal structural reforms in the Eurozone as a success story. And a large number of EU Member States are still not complying with the Fiscal Pact.

    After several years of financial repression policies (the Fiscal Pact and the crackdown on budget deficits) it is clear that the socio-economic disparity
    between Member States has intensified since the onset of the Great Crisis, and the popularity of the EU as a political project has clearly declined.

    The interim results of financial repression

    Empirical trends show that financial repression since 2010 in the main capitalist countries has come at the expense of between 5 and 10 percentage points of GDP growth. Moreover, the very tasks of reducing budget deficits and state debt relative to GDP are made much more difficult by the brakes put on growth. As has become clear, reducing public expenditure is not tantamount to reducing the deficit because it impedes economic development.

    ‘It is extremely sad that European countries are voluntarily restricting their public spending and thus plunging their economies over the fiscal cliff. The US, instead, has learned its lessons from Japan. With their strong warnings about the fiscal cliff, academics and policy makers were able to prevent a new recession in the US. And the US is now much better off than Europe. […] Fiscal stimulus is important because the state is the only debtor that remains in a balance-sheet recession. […] A balance-sheet recession is a malady of an entirely different order from a normal recession. […] If the private sector, despite zero interest rates, pays its debts, the state has to spend money to prevent economic collapse.’[4]

    Monetary policy has become continually more unconventional in reaction to the Great Crisis and weak growth. Quantitative Easing is a direct consequence of the wish to not repeat the economic policy mistakes of the 1930s. This is the main reason why debt is higher today than in 2007. The central banks have accepted a policy of zero interest rates and, combined with Quantitative Easing, this has made borrowing easier. In so doing, however, the central banks have accepted drastic changes in exchange rates. In the United States, the expectation of higher interest rates has been driving up the exchange rate, whereas lax monetary policy in Japan and Europe have caused the yen and the euro to drop in value.

    However, it is not just exchange rates that these policies distort; they also deepen the social divide and cause deformations in the available regulatory tools. The immediate consequences of zero interest rates and Quantitative Easing have been the inflated prices of assets and, at the same time, devalued savings. In the US, pension funds and broad sections of
    the population have overwhelmingly invested in equities and less in bonds and savings. In Germany, on the other hand, a majority of the population provide for their retirement not through stocks, but through state pensions, life insurance, company pensions, or savings. Yet all of these categories are losing value because of zero interest rates. This means that the full consequences of the European Central Bank’s current policies will only become evident in the near future.

    Companies, on the other hand, are swimming in cash. Given the continued sharpening of the social distribution of wealth and the excessive volumes of credit, there is no incentive to increase investment. Debt has now reached levels that make it impossible to return to a normal cycle of interest rates because doing so would have serious consequences for the economy and for the political balance of power.

    The real damage done by these policies, however, is probably in the area of the distribution of wealth. During the last seven years, annual real consumer spending has only risen by 1.4 per cent. The assets effects of expansionary monetary policies has mainly benefited the rich, as they hold the majority of equities. The squeezed middle class, on the other hand, has been unable to recover.

    The dangerous fragility of the financial markets is quite clear from the movement of investments. As the following graph indicates, gold and inflation-protected bonds (TIPS) have only seen investment of about US$ 20 billion, whereas more than US$ 410 billion net has flowed into various securities since the end of the financial crisis. The hunt for high yields is clearly shaping current economic developments.

    The current upward trend is thus fragile for the reasons
    outlined above. Due to the weak euro, low interest rates, the ECB’s expansive monetary policy, and the low prices of raw materials, Europe is facing a modest recovery that could last about four or five years. It is unlikely to be as strong as those of the past given the current structural barriers. Low oil prices, the weak euro, and low interest rates will of course support recovery in the Eurozone, and there is now consensus among forecasters that Eurozone growth will increase by 1.5 % rather than only 1.0 %. Still, 1.5 % only means a slight upward trend that is far from a brilliant recovery.

    Strategically relevant key trends:

    1. The Fed is steering the US economy towards the first interest rate increase since the beginning of the crisis, the only major central bank in the world to do so. Since 2008, the prime interest rate has been at a record low of between 0.00% and 0.25%. Hypothesis: the Fed will administer this rate increase and subsequent steps in homoeopathic doses. The extremely high levels of debt in the public and private sectors will lead the dynamic of accumulation to slow down significantly over a long period. The debt problem has yet to be solved after the recent crisis; instead, the central banks have implemented measures that force everyone deeper into the red.

    2. The rise of the so-called Islamic State in the Middle East constitutes an even more significant factor: the possible collapse of the decades-old economic and political order in the region. States are no longer the only entities wrestling for power; statehood itself, as a structural element, is beginning to unravel. The gap between the winners of globalisation (in China and the West) and the losers (in other parts of the world) has deepened rapidly. State structures are beginning to fall apart in many places. Above all in the Islamic world, there is a frightening increase in the number of ‘failed states’ in which despite rivalling power structures, there is nothing that could be described as a monopoly of state power, and there is no longer a governmental authority that can represent its country at an international level. The international order is out of joint, and the age of Europe – including its US variant – is coming to a close.

    3. Global economic growth is no longer being decided in Europe. Although events in Europe are still relevant, whether the Eurozone continues to stagnate or whether Germany’s economy – as Europe’s hegemonic power – will grow by 1.5% or 1.9% is now of secondary importance. Far more important is whether China’s economy will grow by 6.5 % or 7 % and whether its party and state leadership will be able to keep the country’s more or less serious decline under political and social control.

    4. Credit-driven growth in the Eurozone is largely over. Productivity and potential growth have been eroded by high levels of long-term unemployment. Globalisation has provided little stimulus, and the expansion of trade and of the division of labour has decreased worldwide. And the gap between the financial sphere and the real economy has been stretched to breaking point, just as in 2007.

    A return to the accumulation dynamic of capital?

    After 2007, when policies were being enacted to counter the financial crisis, debt reduction was accepted as the obvious goal. The supersession of the capitalism of easy credit was said to begin with financial repression policies or widespread deleveraging. The problem with this is that a focus on deleveraging by governments and private actors has a dampening effect on the economy. Private households in four central countries of the financial crisis (the US, the UK, Spain, and Ireland) have been able to reduce their debts, but in many other countries the debt-income ratio has actually risen, even to a level higher than had been reached in the crisis countries. After the financial crisis, governments have continued to get themselves into debt or believed they had partly been compelled to do so. Deleveraging in the most indebted countries is based on the assumption of growth rates and/or budget cuts, both at levels that are completely unrealistic.

    The control centre of capital accumulation (interest) has been damaged

    The most recent IMF study (2015) demonstrates that between 2008 and 2014 private investment in rich western countries has lagged behind by 25 per cent when compared to past trends. Cheap money is driving stock prices to ever-loftier heights, and fewer funds are flowing towards new machinery, equipment, and know-how.

    The main capitalist countries have a plentiful supply of investment-seeking capital, which is expressed in a strong tendency towards low
    interest rates – in the context of a strong aversion to private-capitalist or public investment. The major central banks are giving in to this trend and boosting it through low interest rates.[5]

    The reasons for this ‘secular stagnation’ are the subject of a fierce international debate, which has not resulted in any coherence between different positions.[6] However, there is far less disagreement about the consequences: the capitalist economies are in a liquidity trap, and the tendency towards ‘secular stagnation’ means greatly flattened economic growth and very low inflation rates (also known as deflation). At the same time, central banks are working with the lowest possible interest rates, as these cannot be set much lower than zero.

    At the same time, the international financial markets are feeling very insecure about this undisputed instability. The current situation is seen as extremely unstable. Since the beginnings of the financial crisis, there has been no global debt-forgiveness – instead debt has sharply risen; derivative products have not become any less
    complex, and their enormous volume has only grown further. The general view is that politicians and central bankers

    • with their policies of high levels of debt and risky, untested measures

    • have shirked their responsibilities to citizens by implementing policies that were not geared towards strengthening growth or increasing financial stability, but towards more inflation.



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    1. Seven years now after the outbreak of the 2007-2008 global economic and financial crises, there can be no question of a return to dynamic capital accumulation. This has led to a debate within establishment economics on ‘secular stagnation’. See Coen Teulings and Richard Baldwin (eds), Secular Stagnation: Facts, Causes and Cures (London, 2014), <http://www.voxeu.org/sites/default/files/Vox_secular_stagnation.pdf>. Hans G. Despain contrasts ‘mainstream ideas of secular stagnation (MISS)’ with monopoly theories from Marxian traditions (Hans G. Despain, ‘Secular Stagnation – Mainstream Versus Marxian Traditions’, Monthly Review, 67, 4 (2015).
    2. Jürgen Kocka and Wolfgang Merkel, ‘Kapitalismus und Demokratie’, perspektive 21, No. 60 (2014), p. 20.
    3. Kocka and Merkel, ‘Kapitalismus und Demokratie’.
    4. Richard Koo, ‘Die Europäer lassen ihre Wirtschaft abstürzen’, Finanz und Wirtschaft, 2 March 2015. The effectiveness of Fed policy in combination with a moderate policy of restructuring is also questionable.
    5. On the role of the central banks, see Ben S. Bernanke, ‘Why are interest rates so low?’, 30 March 2015, brookings blog, <http://www.brookings.edu/blogs/ben-bernanke/%20posts/2015/03/30-why-interest-rates-so-low/>.
    6. The most important aspects of the explanation for the oversupply of money capital are: A) The impact of changes in the democratic structure on savings behaviour, which has been influenced by state regulations on retirement income. B) Modern production’s low capital depth – today’s leading industries (particularly in the software sector) require far less capital than former heavy industries and therefore also significantly less investment. C) The lower price of capital goods. D) Greater inequality (the rich consume proportionately less, which corresponds to a larger asset accumulation or savings). E) Former Fed chair, Ben Bernanke, stated that the fallen and persistently low interest rates and the international savings glut were particularly caused by countries with net export surpluses – in the past China, today Germany.