INVESTMENT

Capitalism is dead, long-lived


Despite its many failures, capitalism has been a powerful engine of wealth creation and economic development in the last three centuries.

Yet what classical economists and revolutionary theorists, such as Karl Marx, called capital, was actually labeled “equity” by financiers. Sit down earnings Equity of shareholders Division of a company’s balance sheet. Technically speaking, most Capital Was deposited in the 18th and 19th centuries Equality.

Traditional capitalism or “communism”

This does not mean that all equities produced over time were domestically produced or that corporations were fully self-financed. Railway mania in the UK in the 1840s, for example, was a classic stock market bubble that was fed through banks intermediaries using money from their depositors, but also directly by small public investors.

Since then, the underwriting of other people’s money has grown, although “paid-in” capital from public offerings and rights issues has also been part of the corporation’s shareholders ’equity stake.

From the mid-nineteenth century onwards, loans, in the form of bank loans and public bonds, systematically helped finance business. This led Max Weber to observe:

“In modern economic life, the issue of credit instruments is a means of rational assembly of capital.”

Yet until the first decade of the last century, interest-bearing debt played a helpful role in corporate finance and even less in the lives of consumers. Apart from the frantic demand for U.S. railway bonds after the Civil War or the occasional speculative cycle of excessive amounts of family credit in the 1920s, the main sources of private sector financing in the first 250 years of capitalism were equity and private savings.

This situation changed gradually after the First World War and then more rapidly in the last half century.

Book jacket in the history of financial markets: a reflection of the past for investors

Financial control and innovation

President Richard Nixon’s decision to end the Bretton Woods international monetary system in the early 1970s opened a Pandora’s box of mobile cross-border finance. Infrastructure, led by the creation of structural derivatives, immediately gained prominence. Over the next decade, under President Ronald Reagan in the United States and Prime Minister Margaret Thatcher in the United Kingdom, a wave of product innovation ensured that the “box” could never be closed.

This huge credit creation has inspired the junk bond frenzy and the roar of the 80s and savings and loan failures, the emerging market crisis in Mexico, Southeast Asia, and Russia, and the proliferation of leveraged buyouts (LBOs) as well as subprime mortgage millennia before and after millennia. .

The provision of personal credit has been particularly pronounced in recent years after the break from the 200 to 2010 credit crunch when financial stimulus was received. Every debt product-sovereign, emerging market, financial and non-financial corporate, housing, consumer, student and healthcare তায় at or near all-time highs. Total debt was measured at 150% of U.S. GDP in 1980; Today it hovers at 400%. At the worst stage of the Great Depression it was 300%.

Nowadays, debt plays a bigger role than equity. Last year, the global bond market grew to% 130 trillion worldwide, up 30% in the last three years. Various sources put the total capital of equity-backed securities at three-quarters and 0% of that amount, largely due to unprecedented quantitative easing (QE), which fuels a rally in stock valuations.

It’s just a part of the story. Even before the epidemic, credit was expanding much faster than stock offers. In 2019, the securities industry raised .5 21.5 trillion worldwide. About 21 21 trillion of that capital was raised in the form of fixed income. Only 40 540 billion came from ordinary and preferred shares.

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There is no redemption

There is a strong underlying driver behind the modern popularity of credit.

According to the prevailing rules of capitalism, debt is contractual due before or after maturity. From 0% of gross national product (GNP) after the Revolutionary War, US government debt was fully repaid in the 1940s. After rising to 0% during the Civil War, it dropped to 5% by the end of the nineteenth century. It rose to about 0% due to World War I in World1 and then shrunk to 15% during the Great Depression.

The combination of the new treaty and World War II combined government debt to 100% of gross domestic product (GDP), a new metric introduced in 1934. In the 1970s, successive administrations, whatever their political risks, reduced this proportion to 30%.

Until then, the government had shown equally exemplary behavior for citizens and businesses: eventually o had to settle. As economic sociologist Wolfgang Strick noted, under the Kennesian blueprint:

“The economy is expected to pay off because the economy returns to adequate growth and generates a surplus of savings on public budget spending.”

Everything changes when Reganmix adopts a semi-permanent government orrow for tax revenue. The model has gained acceptance not only in the United States or among right-wing political parties, but around the world and across the political spectrum. On Reagan’s watch, U.S. national debt tripled from about 700 700 billion in 1980 to about ট্র 2 trillion in 1988, Growing from 26% to 41% of U.S. GDP.

Since the 1980s, public debt has increased across all OECD countries. Save for a short time under U.S. President Bill Clinton, nations have seldom adopted the Keynesian policy of disciplined reduction, or Streak what he calls a “state of consolidation”, as opposed to today’s “state n state” where governments make little real effort to cut costs. U.S. debt now exceeds 100% of GDP.

Corporations and consumers follow in the footsteps of their government and employ a large amount of credit. The risk is that excessive use of debt can lead to bankruptcy, financial crisis and recession. This was a common sight in past economic cycles. The recession will force borrowers to cut costs and find ways to reduce their liabilities. Banks will stop issuing existing loans and address their existing crisis loan portfolios.

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Liability for permanence

This story is no longer prevalent. Debt is actually so broad that the word capitalism has become a misnomer. We are now living in an age of leverage or hatred. This model indicates that, in a crisis, the orrow recipients and donors re-discuss, modify, and extend, i.e. convert and redefine the convert. Debt agreements are becoming more flexible.

For all the internal instability that triggers leverage, governments encourage private donors to avoid recessions and may take to the streets until the economy recovers. Lenders agree because they do not make money from interest on loans – in a debt litigation system, interest rates are lower – but cover the financial system from arrangements, pre-payments, fines, consent and advisory fees, as well as syndication fees from default risk distribution. .

Historically, the government borrowed money to pay for war and to deal with the recession, while the private sector – business, landlords and consumers – did so in times of prosperity. But as Alan Greenspan explains, the period of relative economic stability between 1983 and 2007 – known as the Great Moderation – is “exactly the tender that burns the bubble.” Two and a half decades of shallow recession and financing encouraged everyone to take risks.

In the face of stubborn lazy demand, we are more likely to not be able to increase our debt burden. But despite the Biden administration’s promise to forgive student loans, the ongoing debate over the application of this policy may be missing from our joint loan book. Very few people have raised the possibility of never redeeming this evergreen debt, but instead, are constantly turning it around in the face of adversity.

Future Report Graphic's Investment Professional

Although a permanent debt overhang adds chronic stress to the economy and may eventually require some form of financial catharsis, unless governments around the world cooperate with Great Delivering or Great Right-Off Engineers, the age of perpetual and extreme leverage is here to stay.

Without moral danger, such a system elicits a philosophical question:

The loan that no one wants or needs to repay should be considered debt Or Equality?

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: © Getty Images / Bubble


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Sebastian Candarel

Sebastian Candarel is a private equity and venture capital advisor. He has worked as an investment executive for multiple fund managers. He is the author of several books including N trap And Good, bad and ugly personal equity. Candarel also lectures on alternative investments in business schools. He is a Fellow of the Institute of Chartered Accountants in England and Wales and holds an MBA from The Wharton School.



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