The Demise Of Casino Capitalism

Banking, finance and markets exist to make the economy run smoothly. From money transfers and currency exchange, to raising capital for new or existing companies, their role is supportive and secondary. Finance is like a dog’s tail: basically useless except for maintaining balance. And, like I’ve said many times before, in the US the tail is now wagging the dog.

Finance, insurance and real estate (the FIRE tail) accounts for an enormous 22.3% of America’s total GDP, nearly double professional services, the second largest sector.  If we add Government, another sector that acts as an economic facilitator as opposed to being a primary producer, the total rises to an astonishing 35% of GDP. (Keep this in mind, I’ll revert to it at the end).

By stark contrast, Manufacturing which was once America’s proud creator of the currently evaporating middle class, has shrunk to fourth place at a mere 10.8%..

Looking at financial businesses alone, their share of GDP has quadrupled to nearly 9%.

The “financialization” of the economy may produce enormous and quick rewards for those select few who can take advantage of it, but it does absolutely nothing for all the rest. I mean, hedge fund managers are making $1+ billion per year, but employees at the companies whose stocks he/she is trading often need food stamps to survive (keep this in mind, too).

Like all bubbles, the finance economy has gone to extremes. While you may dismiss some crazy instances like GameStop, DogeCoin and “art” NFTs as one of a kind aberrations, you can’t ignore what is happening to the overall stock market.  Its total capitalization now stands at an all time high 200% of GDP, well above the 140% reached during the dotcom mania (1999-2000) and double the level of 2007, right before the Debt Bubble burst.

Is this casino capitalism economy sustainable? Of course not, the tail can’t keep wagging the US dog, particularly when there are other much less waggy dogs out there nipping at its heels (eg China, as Biden himself put it, “is having our lunch”).

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Final thoughts: the US won the Cold War when the USSR collapsed, seemingly within days. At the end, USSR was spending almost 20% of its GDP on defense while its middle class had to scrounge to find even basic necessities. It’s not a perfect parallel to the US today, of course, but it sort of rhymes, just substitute finance for defense.

There is one major difference: unlike the USSR, in the US the average Joe can dream of hitting it big by hard work, guts and brains, even if his/her chances of success are actually minimal. Americans, however, have (finally?) come to realize that the American Dream is now pie-in-the-sky, a situation creating huge dissent and class division. Never before  have mainstream American politics been so decisively shaped by polar opposites like Trump and Sanders. 

Here’s a question: could America’s version of Casino Capitalism collapse almost overnight (in a historical time scale)?