The Perilous Path of Financialization

Credits: Financialization = Ruin

How Great Economic Powers Tend to Lose Their Way

The United States has long been an economic powerhouse, but there are concerning signs that its economy is becoming too focused on finance rather than productive activities. This phenomenon, known as "financialization," has historically signalled the decline of major powers. 

What is Financialization?

Financialization refers to the increasing dominance of the financial sector over the overall economy. As an economy becomes more financialized, it relies heavily on activities like lending, investing, and speculating rather than producing goods and services.

The financial industry's share of U.S. GDP has ballooned from around 10% in 1970 to over 20% by 2010. This expansion was fueled by policies that encouraged cheap credit and debt accumulation.

Historical Parallels

Economic historian Giovanni Arrighi studied the rise and fall of capitalist systems dating back to the Renaissance. He found that major economic powers tend to follow a cyclical pattern:

1. Early success driven by trade and production
2. Financialization as productive capabilities mature
3. Temporary illusion of renewed prosperity 
4. Eventual decline and transition to the next leading power

The financialization phase provides an "illusory respite from the trajectory of decline" by allowing the incumbent power to attract capital through financial activities. However, it ultimately accelerates the underlying economic erosion.

Britain exemplified this cycle in the late 19th century. Its industrial growth stagnated during the "Long Depression" from 1873 to 1896. However, shifting toward finance created a deceptive "belle epoque" boom before its eventual downfall in World War I.

America's Financialized Economy 

According to Arrighi, the U.S. reached its own "signal crisis" in the 1970s with high inflation, a weakening dollar, and a loss of manufacturing competitiveness. It responded by embracing Financialization, setting the stage for decades of debt accumulation. 

The apparent prosperity of the 1980s and 90s gave the "illusion that the United States had 'come back.'" In reality, it was just capitalizing on the dollar's reserve currency status to borrow and spend beyond its means.

By the late 1990s, cracks began to show with the Asia financial crisis, dot-com bust, and ultimately the 2008 housing meltdown. Desperate measures like quantitative easing have only kicked the can further down the road.

Sustaining the Illusion?

As Arrighi warned, "A similar blindness is evident today" - an inability to recognize that Financialization's benefits are transient. The U.S. risks following the path of past hegemons who mistook "autumn for a new spring" and declined catastrophically as a result.

To break this cycle, the U.S. may need to reorient its economy toward productive capabilities and sustainable investment rather than financial engineering. Otherwise, it risks succumbing to the same fate as historical powers that let Financialization consume them.

For investors concerned about positioning their portfolios for resilience amidst these economic tides, professional wealth management guidance can be invaluable. I have partnered with one of Canada's leading private wealth management firms serving high-net-worth clients nationwide. This firm offers professional investment management and comprehensive wealth planning from a client-first perspective, providing affluent Canadians access to sophisticated strategies and solutions usually reserved for the ultra-affluent.

Driven by a "capital preservation first" philosophy, the firm generates consistent, tax-efficient returns uncorrelated to public markets. My clients gain exclusive access to alternative investments such as private equity, private real estate, government-sanctioned flow-through tax structures, and tax-sheltered corporate insurance solutions.

As a valued reader, we are offering a complimentary portfolio evaluation to ensure your portfolio is resilient amidst these changing economic tides.

To schedule your portfolio evaluation, please email me at aspitters@pfcwealthsolutions.com or use my Calendly Link.

To continue receiving my posts, please follow Adrian C. Spitters FCSI®, CFP®, CEA®, and sign up for my newsletter, Lasting Financial Security.

Please also check out and join my new group, The Counter Narrative.

Do you find value in the articles I write? Please subscribe to my weekly newsletter, which summarises my best stories of the week: SUBSCRIBE.

FOLLOW ME ON LINKEDIN.

#economics #finance #financialization #history #tradepolicy #manufacturing #hegemonicstability #wealthmanagement #investing #portfolios