Understanding Global Financialization

Global Accumulation and Interconnectedness

The world economy is going through a period of financial accumulation. The ratio of the stock of foreign investment liabilities to GDP jumped from 51% in 1995 to 183% in 2016 (McKinsey, 2017). For anyone familiar with modern history this should be no news. Taking a long-run perspective, from the Renaissance to our times there have been four “long centuries”, each of them marked by a phase led by production and trade, followed by another one driven by financial activities. The same pattern was observed in Genoese hegemony of the 15th and the 16th centuries, the Dutch leadership of the 17th century and the British empire of the 19th century (Arrighi, 1994). The contemporary systemic cycle, commanded by the United States, has been in place for more than 100 years. Its current phase started in the 1970s and has been labeled financialization. The most widely used definition of financialization is the one given by Gerald Epstein, who has defined it as “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.”

Among the most salient features of financialization we find a growing interconnectedness of financial systems, the emergence of shadow banking, increasing financial innovations and the diversion of investment from the real to the financial sphere of the economy. The result of these compounded changes has been an unstable global financial system. Although for some time the belief about a Great Moderation spread across financial markets and governments around the world, the financial crisis of 2008 and the Great Recession that it gave way to brought everybody back to reality. A reality that finds most of us subject to massive upheavals coming from the financial sphere, where decisions are hardly made following social welfare but short-term profit criteria.

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