The financialization of the global economy over the past half-century explains how credit has become the main instrument for fund managers and other financial institutions to get rich
Capitalism is praised for its adaptability and talent for reinvention. Although it originated from mercantilism in the 16th century, the rise of its modern version came two centuries later during the Industrial Revolution in Great Britain.
This economic system has had various commercial and financial interpretations even if its mechanism of wealth accumulation has long remained classical. It was described with precision by Karl Marx in his masterful work Capital. Marx explained that the appropriation of capital is derived from reinvesting the profits generated by the factors of production, largely to the detriment of the workers providing their labor. At the time, the term ‘capital’ was construed in its narrowest sense as ‘equity’.
Debtism: The Economic Fulcrum of Leverage
This definition of capitalism now refers to just one of its facets. The financialization of the global economy has led to a gradual but tangible transformation of markets. Alongside a standard capitalist model, represented in particular by a new generation of entrepreneurs in the technology sector, a mechanism exclusively focused on credit governs all economic activity. For the past half-century, and in particular during the subprime bubble and the crisis that followed, this financing weapon has grown exceptionally, so much so that we can talk of the golden age of debt, or ‘debtism’.
A traditional capitalist enterprise must be profitable to be perceived as sustainable. Cumulative losses lead to the erosion of equity and, by extension, to the loss of all commercial credibility.
In contrast, a company operating according to the debtist model attaches little importance to amassing capital through the means of production. The objective is to maximize operating profits which form the basis of any negotiation with creditors and will warrant debt optimization. Interest expense should erase taxable profits to avoid any cash leakage to third parties such as the IRS.
Living off other people’s savings
Long-term debt has replaced equity as the mainstream financing tool. By taking on loans secured on other people’s assets, private equity fund managers have perfected the art of leveraged transactions that aim to systematically and repeatedly refinance the capital structure of portfolio companies and thus facilitate the distribution of dividends. The accumulation of capital takes place first and foremost outside the production process.
Marx and other economic historians like Max Weber and Joseph Schumpeter considered credit a formidable instrument of speculation. None of them suspected that it would one day supplant equity as the main source of wealth accumulation.
Unlike conventional industrial or financial capitalism, the debtist system is not based on the product of labor and the expropriation of the company’s profits. Its operation involves the creation of financially engineered gains and dividends yielding commissions, management and advisory fees charged on other people’s retirement pots and personal savings. Our pension funds, life insurance contracts, brokerage accounts and bank deposits are all means of enrichment for asset managers. Where capitalists rely on our productivity, debtists binge on our prodigality.
On the other hand, debtism also thrives on activities that complement our toil and savings. Since Marx’s time, various laws concerning working conditions have severely depleted the opportunities for labor exploitation. The financial elites had to explore new avenues to squeeze out a larger portion of the added value within our economies.
Living off other people’s consumption
Workers are now better protected, but households are frequently subjected to intense expropriation practices. The consumer society that materialized during the post-war years would never have been so successful without the mass promotion of credit, a near-unlimited source of profits in the form of commissions, penalties and interest for many financial institutions. Naturally, debtists follow a similar modus operandi when it comes to mortgages.
Meanwhile, credit keeps on eating the world. The years preceding the pandemic witnessed considerable expansion in the four main areas of US household debt: home, auto, student and credit cards. Recent lockdowns and other economic restrictions might have slowed the growth in consumer credit, yet it is unlikely to reverse for long. There is too much money to be made for participants, political activists, consumer protection advocates and regulators to counteract this secular trend.
To go into debt is to get poorer. This tautology, undisputed and indisputable until the last century, is now all relative. If it corresponds to the reality for individual borrowers required to meet their obligations, for credit promoters our indebtedness, or even our impoverishment, is an effective way to subtract transaction costs of which we hardly realize the magnitude.
Debtism is the result of a recent mutation of capitalism; a model that sees us serving not exclusively the private interests of employers but, less noticeably, those of fund managers and lending institutions that do not benefit so much from the proceeds of our labor as from those of our savings, retirement plans and consumption.
Originally published on 16 February 2021 at ValueWalk