Financial Economy

This book examines how contemporary financial economy evolved as the

predominant economic system, and why unabated accumulation of financial
capital takes place in such systems. It reviews the mechanics of accumulation
of wealth by tracing the historical roots of financial capital. Traversing the
evolutions of capitalist systems since the 1850s till recent times, Financial
Economy provides a lucid and logical explanation of the phenomenon.
It uses a new methodology based on economic circuit of stocks and flows
following the early ideas of the French economists of the 18th century and
the contemporary Circuit school. It provides an alternative framework for
studying economic systems design, keeping aside the orthodox neoclassical
analysis of equilibrium market exchange. Further, it highlights the global
financial circuit, the state of the current digitalised economy with electronic
money transfers, consumer’s decision-making and expected future earnings,
and questions the relevance of some fundamental concepts of economics as
well as economic policies. Using a notion of sequential economy, it also shows
how present economic activities are treading upon the future.
This book will interest students and researchers of advanced macroeconomics,
political economy, heterodox economics, economic history, and evolutionary
economics. The historical account of the evolutions of capital, interest, and
corporate structures will also be of interest to general readers.

Smita Roy Trivedi is Assistant Professor at the National Institute of Bank

Management (NIBM) in India. She has a PhD in economics from the University
of Kalyani, West Bengal, India, where she has worked as UGC research fellow.
With specialisation in financial economics and banking, she is currently
involved in teaching, training, research, and consultancy in the areas of
international banking, financing of international trade, and technical analysis
of financial markets. Her research interests include financialisation, central
bank intervention, and bank profitability. Her most recent publications have
been featured in Economic Papers: A Journal of Applied Economics and
Policy (2016) and Asia-Pacific Financial Markets (2016).

Sutanu Bhattacharya is Professor of Economics at the University of Kalyani,

West Bengal, India, and has been engaged in teaching and research since 1978.
Along with a PhD in economics, he has professional qualifications as a cost
and management accountant and an operational researcher. He specialises in
financial economics, business accounting and corporate finance, operational
research, econometrics, history of economics, and economics of education.
In addition, he has work experience in the fields of corporate finance and
educational administration. He has published widely, and has worked as a
covenanted staff member in the Finance Division, Chloride India Ltd. and as
Joint Secretary, University Grants Commission, India.
Financial Economy
Evolutions at the
Edge of Crises

Smita Roy Trivedi and

Sutanu Bhattacharya
First published 2018
by Routledge
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Contents

List of figuresvii
List of tablesviii
Prefaceix
List of abbreviationsxii

 1 Introduction 1

  2 Paradoxes of crisis and growth: the landscape 10

  3 The twin concepts of capital: historical roots 30

  4 Financial breeding: legitimisation of interest

on money 43

  5 Critique of neoclassical economics and revival

of the idea of circuit analysis 62

  6 The circuit construct: nascent corporate

production economy 82

  7 Rudimentary formulation of the circuit 101

  8 Matured corporate accumulation: the

creditisation phase 124

  9 The financial circuit: leveraging the growth 143

vi  Contents
10 Concluding note: the present as the future 162

Appendix: Notes on some financial aspects171

Bibliography190
Index207
Figures

6.1 Nascent corporate production circuit, 1850–1930 94

6.2 Central part of the corporate production circuit 95
8.1 Matured corporate economic circuit: creditisation
phase since the 1940s 133
9.1 The real and financial circuit 153
Tables

2.1 World growth rates of GDP by region 12

2.2 World per capita GDP growth rates by region 12
2.3 Savings rates as percentage of GDP in select countries 18
2.4 Household debt as percentage of net disposable
income in select countries 19
2.5 Forbes Global 2000 – top companies’ assets 20
2.6 Forbes Global 2000 – top companies’ revenue 20
2.7 Growth rates of gross capital formation in select
countries, 1976–2015 25
7.1a Items of initial money stocks and transfers 105
7.1b Items of circuit flows 105
7.1c Items of economic outcomes 106
7.2 Household sector’s stock balance sheet 110
7.3 Household sector’s flow account 110
7.4 Corporate production sector’s stock balance sheet 111
7.5 Corporate production sector’s flow account 112
7.6 Banking sector’s stock balance sheet 113
7.7 Banking sector’s flow account 114
A.1 Rentier income share in GDP in India, 1981–2016 187
A.2 Manufacturing sector and rentier incomes as
percentage of GDP in India, 1981–2016 188
Preface

The present as the future:

If we are all dead in the longer run,
We don’t survive in the present either.

After the global financial crisis of 2008 we have become concerned

about the economic future that lies ahead. The concern is to know
what is happening and how it is happening in respect of our economic
existence. A reflection of this concern is also found in economic stud-
ies. A large volume of studies has now emerged giving descriptions of
the events and the courses of development of the crisis of 2008. The
discussions we find in economic literature are often too technical and
address one aspect or another in bits and pieces. Consequently, we lose
sight of the forest for the trees – our focus on what is happening on the
whole gets blurred in a large volume of literature and so the question,
why is it happening, goes completely out of focus.
What do we see on the whole in the current economic landscape?
We see the corporate sector, or more specifically the large global cor-
porations, continuously accumulating its wealth at an alarming rate
while the household sector and the national governments are slip-
ping into more and more accumulated debts. This is a now a global
phenomenon.
At the background we see a growing financial economy over the
last few decades with almost all monetary transactions now linked
to an intricate global financial network. And it is growing even when
our production sector stagnates. How has this become possible? More
alarming is the fact that most of our financial savings is now linked
to this global financial web and may evaporate overnight in financial
crises originating anywhere in the web. Any major financial default or
bankruptcy may spread like a wildfire in this web. We used to have
x  Preface
faith in our national governments as the rescuer of the last resort, but
here is also a big question mark, now put by the recent sovereign debt
crisis in Europe. With an uncomfortable feeling at the back of our
mind, we ask ourselves – is this the world we created and how?
The economic systems are not something given to us; they evolve
through the economic constructs or institutions we create. The eco-
nomic system we live in today has come through several economic
evolutions that started with the Age of Capital in the 1850s in the
West. It traversed a long way through repeated crises and the conse-
quent evolutions out of necessity to obviate the crises. To understand
what is happening and why it is happening now in the economic arena
we need to trace the economic evolutions – why and how we created
this world.
We discuss here broadly three phases of evolution – the nascent
corporate production system (1850–1930), the matured corporate
production with creditisation (1945–70) and, finally, the financial
economy since the 1990s. Each of these phases evolved in the con-
text of one crisis or another in the existing system. Probing the funda-
mental nature of the economic systems and their crises in these three
phases, we may get some answer to our questions.
This book does not deal with the technical details of different finan-
cial commodities and operations in various financial markets. It focuses
rather on the organisational evolution of the financial economy and its
implications. Moreover, we rarely get any clear idea in respect of our
questions from the conventional economic theories. Therefore, before
tracing out the economic evolutions, we have examined at some length
the conventional economic ideas and methodologies to locate the con-
ceptual ambiguities that prevail at the foundation of mainstream eco-
nomic analyses, for which they are unable to answer our questions.
A paradigm shift in economic studies is now required. We propose
an alternative – the economic circuit methodology – for studying the
organisational evolutions in economic systems through the crises.
This book is just an attempt to explain, overall, what has so far hap-
pened and what is now happening around us. It does not try to predict
what will happen next – another economic evolution in a new direc-
tion, a structural transformation in our current economic systems, or
a hopeless economic devastation. We await the answer to come in the
future.
This book has been built on the contributions of celebrated eco-
nomic thinkers – from the French physiocrats to Karl Marx, Michal
Kalecki, and J. M. Keynes, and, finally, the modern circuit theorists –
to whom the authors acknowledge a profound intellectual debt. Prof.
 Preface xi
Sutanu Bhattacharya acknowledges Prof. Amiya Kumar Bagchi and
Prof. Sunanda Sen, who have encouraged him to question, deliberate,
and reflect. Further, he remembers his parents, who taught him how
to think. He expresses his indebtedness to his colleague Prof. Byasdeb
Dasgupta, with whom he has shared some of the ideas, and above all
to his students, who have given him indirect inputs to conceptualise
and develop the idea.
Dr Smita Roy Trivedi acknowledges her deep intellectual debt to her
mentor (and co-author), Prof. Sutanu Bhattacharya for the conception
and development of the theoretical construct and its implications. The
continued support of her family – Ashmi Trivedi (daughter), Akshoy
Trivedi (spouse), R. N. Roy and Subhra Roy (parents) – are beyond
words to express. She sincerely acknowledges the enthusiastic encour-
agement given by her colleagues and the director, NIBM.
Abbreviations

ABS Asset backed securities

BIS Bank of International Settlements
BRIC Brazil, Russia, India, and China
CBO Collateralised bond obligation
CBOT Chicago Board of Trade
CDO Collateralised debt obligation
CDS Credit default swap
CEO Chief executive officer
CFTC Commodity Futures Trading Commission
CLO Collateralised loan obligation
CME Chicago Mercantile Exchange
CSO Central Statistical Organisation
DCL Degree of combined leverage
DFL Degree of financial leverage
DOL Degree of operating leverage
DPS Dividend per share
E&D Equity and debt
EBIT Earnings before interest and tax
EMS European monetary system
EPS Earnings per share
EU-15 The European Union countries consisting of Austria, Bel-
gium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, Spain, Swe-
den, the United Kingdom
FIH Financial instability hypothesis
FX Foreign exchange
GCF Gross capital formation
GDI Gross domestic investment
GDP Gross domestic product
GNP Gross national product
 Abbreviations xiii
HNI High net worth individual
IBRD International Bank for Reconstruction and Development
ICT Information and communication technology
IET Interest equalisation tax
IMF International Monetary Fund
LDC Less developed country
M&A Merger and acquisition
MBS Mortgage backed securities
NAS National Accounts Statistics
O&M Organisation and method
OECD Organisation for Economic Cooperation and Development
OPEC Organisation of the Petroleum Exporting Countries
OTC Over the counter
SDR Special drawing rights
SEC Securities and Exchange Commission
SIV Structured investment vehicle
SPV Special purpose vehicle
TMC Theory of monetary circuit
TNC Transnational corporation
UNDP United Nations Development Programmes
USSR Union of Soviet Socialist Republics
WTO World Trade Organisation
1 Introduction IntroductionIntroduction

The principal aim of this book is to examine how the contemporary

financial economy evolved as the predominant economic system, and
why unabated accumulation of financial capital takes place in it. The
book intends to explain the mechanics of accumulation of financial
capital in economic systems by tracing out the historical roots of
financial evolutions at the edge of crises. The secondary aim is, keep-
ing aside the orthodox neoclassical analysis of equilibrium market
exchange, to bring into focus an alternative framework for studying
economic systems designs in terms of economic stocks and flows, fol-
lowing the circuit analysis of the French physiocrats. In a nutshell,
the objective of this study is threefold – tracing out the evolutions
of capitalism through crises in the historical contexts, developing for
this an alternative methodology of economic circuits, and establish-
ing logically the accumulation of wealth as a systemic phenomenon in
capitalist systems.
The rationale behind this book could be seen in the context of the
historical crises and the turning points of the capitalist economy. The
economic scenario in the last few decades has seen sweeping changes
in the financial sector. The investments and production capital in the
real sector is stagnating, but a continued growth of financial capital
has been taking place almost in the form of an explosion. Another
paradoxical feature is that alongside this phenomenal growth in finan-
cial assets and increasing dominance of the financial sector, we see
recurrence of financial crises in the system.
There are several other paradoxical features of contemporary eco-
nomic growth, like the service sector growth paradox, productivity
paradox, which remain unexplained in the conventional analytical
framework of economics. A striking fact is that never in the recorded
economic history before the industrial revolution has such high
economic growth and accumulation of wealth alongside widening
2  Introduction
inequality been seen. The huge financial wealth of the top global cor-
porations and high net worth individuals (HNIs) has now dwarfed
many national economies. In a recent study, Piketty has highlighted
the growing accumulation and concentration of wealth and inequal-
ity as global phenomena. Analysing a large volume of data he has
sketched out the evolution of inequality since the beginning of the
industrial revolution in Western European society (Piketty 2014). Our
question, vis-à-vis Piketty’s study, is how to give a logical explanation
for this statistical phenomenon.
In this context, an ‘inquiry into the nature and causes of the wealth’
creation in economic systems needs a review. But how do we make this
review? Neoclassical economics does not provide a satisfactory frame-
work for understanding the creation and accumulation of wealth in
economic systems as it is beyond the scope of the equilibrium market
exchange framework. The circuit approach of studying economic sys-
tems in terms of economic stocks and flows, as developed in this book,
gives an alternative methodology for probing the structural founda-
tion of economic systems and seeing how wealth and debt in various
forms of stocks can accumulate through various circuit flows.
The central theme of the book is tracing out the evolutionary stages
of Western capitalism. We mark three stages of evolution. First, we
see the nascent stage with corporate industrial production in the West
after the industrial revolution (1850–1930) with some scant replica-
tions of corporate production systems in the colonies. Second is the
matured stage of the corporate production economy of the West with
creditisation of money (1945–70). At this stage, corporate produc-
tion systems also evolved in other national economies, especially in the
newly independent developing countries. The final stage we mark as
the current stage of financialisation and globalisation since the 1990s,
now creating a single global economic circuit.
We must mention that the evolutions which we are considering here
are the organisational evolutions that emerge out of the necessity cre-
ated by the crises in economic systems. The source of the crises is
the continuous accumulation of financial capital in the systems. This
view of organisational evolution is clearly in contrast with what Marx
pointed out as ‘forces of production’, what Weber pointed out as the
‘protestant ethics and the spirits’ of capitalism, and what Schumpeter
tried to highlight as technological ‘innovations’. Our focus is on the
organisation of capitalism, which evolved in the West and established
its global supremacy. We call this organisation an economic circuit.
The continuous accumulation of financial capital in economic circuit
causes crises and leads to its subsequent organisational evolutions.
 Introduction 3
The central point in this evolutionary process is what the current
theory of monetary circuit calls the ‘paradox of profits’. Profits gener-
ate through buying cheaper and selling dearer. This is evident in all
trading activities, whether on goods or on financial commodities that
we see in recent times. In industrial production activities, this simple
fact got somewhat camouflaged in what the classical and neoclassical
economics call value addition by the manufacturing process. But the
fact remains – money to be received through sale of the goods pro-
duced must be more than the money paid out as its cost of production.
A justification for this may be given as ‘value addition’, but in effect it
is also buying cheaper and selling dearer.
The paradox of profits is quite simple. Profits could be realised by
one individual in a process of buying cheaper and selling dearer, but
there would be an equal amount of loss to those who sold cheaper or
bought dearer. Therefore, in an economy as a whole, aggregating the
gains or losses of all individuals, there are no profits. Yet, profits are
not only the facts of reality, but also reflect accumulated wealth in
economic systems. How do we then resolve this riddle?
Economic studies have lived with many paradoxes. We begin with a
brief look at some of the paradoxical phenomena in our present eco-
nomic landscape. From the narration of these paradoxes in Chapter 2
we get a clue – possibly the continuous accumulation of financial capi-
tal in economic systems could be a key factor behind these apparently
paradoxical phenomena. This leads to a deeper question – how finan-
cial capital evolves and accumulates in economic systems? In Chap-
ter 3 we probe the historical roots of the evolution of financial capital,
as distinct from physical (production) capital. At the foundation of
our analysis we need conceptual clarity in using these two terms. We
make an attempt to trace out the evolution of the concepts and con-
notations of the term ‘capital’ in economic literature with reference to
the ideas of financial and physical capital. Without a clear demarca-
tion between physical capital as a means of production and financial
capital as financial resources, the concept of capital remains elusive.
Traditionally, classical and neoclassical economic studies have con-
sidered capital in its physical dimensions only – the capital goods as
the produced means of production. Only recently financial capital as a
separate entity has come into focus in the studies of financial econom-
ics. However, the concept of financial capital is still somewhat amor-
phous, without a clear definition demarking as well as relating it with
production capital in an overall analytical framework.
Intertwined with the evolution of capital as a monetary fund, inter-
est on money evolved as another key economic entity. However, its
4  Introduction
legitimisation as an economic phenomenon took some time and so,
in the early economic literature, the concepts of capital and interest
were used in various contexts with varied connotations. In Chapter 4
we trace out the advent of the phenomenon of interest in human his-
tory, its evolutions in different forms and, later on, the recognition of
money interest in economic literature. The implications of interest rate
are of fundamental importance in this study. It links the future with
the present, presuming an everlasting growth in the future over the
present, without which a positive interest rate cannot be sustained.
Therefore, it gives a way of discounting the future to the present, and
thus acts as an instrument of creating financial claims in the present,
treading upon the future. Further, by our economic construct, firms
charge, on one hand, interest on the debt finance and, on the other,
depreciations on the physical assets created out of it. The dynamic
implications of this economic construct of charging twice for capital
(in two forms) for the economy in aggregate have not been exam-
ined in economic studies. Yet, it is a clear source of accumulation of
financial capital by the firms and thereby creating a mismatch in the
longer run between the further debt financing required by the firms for
physical capital and the finance that would be available with the banks
through repayments of loans with interest by the firms.
Accumulation of financial capital as a stock can only be traced out
properly in terms of stock-flow relations in economic systems. Unfor-
tunately, this cannot be done with the aid of the neoclassical meth-
odological framework of equilibrium market exchange. In Chapter 5
we point out why neoclassical economics disappoint us in this respect
and propose an alternative methodology of circuit theory of viewing
economic systems in terms of economic flows and stocks. As the back-
ground of this circuit methodology we trace out its historical roots
in the French physiocrats’ circuit formulations, and then in its recent
revival in the theory of monetary circuit. The current theory of mone-
tary circuit reveals an important fact – there cannot be monetary prof-
its within a closed economic circuit. The circuit theorists mark this as
the ‘paradox of profit’ and have tried to resolve this paradox in many
ways. However, that money profit cannot arise in a closed circuit is
the theoretical underpinning of our study – an economic circuit must
earn monetary profits through monetary flows from outside and for
that matter it must be an open circuit. So here, we construct not a pure
closed monetary circuit, but an open economic circuit with flows of
production, trade, and finance, as well as creation of their correspond-
ing stocks. We must mention that in this circuit methodology we con-
sider the actual flows and stocks of economic entities. The neoclassical
 Introduction 5
abstract concepts of demand and supply reflecting the desires, say con-
sumption demand or investment demand, of the economic agents do
not fit into the circuit methodology.
Using the circuit approach of stock-flow relations we examine the
evolution and operation of the corporate economic circuit and its accu-
mulation of financial capital in three stages of evolution – the nascent
corporate production circuit in the West (1850–1930); the matured
corporate production circuit of the West (1945–70) with similar cir-
cuits operating in the national economies of the developing world; and
then a single global corporate financial circuit now shaping since the
1990s. We discuss the circuit operations and implications as well as
the crises leading to the next turn of evolution in these three phases in
Chapters 6 through 9.
The nascent corporate production circuit began in Western Europe
in the 1850s. This is marked as the beginning of the ‘Age of Capital’
(Hobsbawm 1975). In Chapter 6 we give briefly a historical account
of the organisational evolution of company as a business entity – from
the earlier joint stock companies to the formation of limited liability
companies. Then we develop the chart of the nascent economic cir-
cuit with corporate production and discuss its operations through the
flows and the creations of stocks. The circuit operated with the Gold
Standard money and achieved its golden era of realising money profit
and accumulation of financial capital through colonial trade with the
rest of the world. But soon it reached its limits. The Gold Standard
money that ensured a ‘golden era’ turned into the ‘golden fetters’, as
Keynes had famously expressed it, and came the crisis of the 1930s.
Facing this crisis, the corporate production circuit needed an organi-
sational evolution.
Before going into discussing the next stage of evolution, in Chapter 7
we have made some detailed analysis of the operations of economic
circuit at the nascent stage with the help of its rudimentary formula-
tions. The sectoral accounts of the flows and the formation of the
stocks in the balance sheets are presented here. Since the rudimentary
production circuit remains at the foundation of capitalist economic
systems, the internal dynamics and economic growth (endogenous and
exogenous) of the rudimentary economic circuit are examined here at
some length.
The organisational evolution that became a necessity to remove the
‘golden fetters’ and to recover from the depression of the 1930s took
place in the next stage. This organisational evolution was reflected
in three forms – institution of central banks and endogenous credit
money creation by banks; government fiscal systems incorporating
6  Introduction
Keynesianism; and Bretton Woods arrangements of international
monetary systems. In Chapter 8 we begin with a brief account of
these institutional changes in the mid-1940s as the background of the
organisational evolution of the matured corporate production circuit
in the West. This economic circuit was replicated also in the devel-
oping countries. So we had several country-specific circuits at this
stage. However, it was the economic circuit of the developed West that
attained maturity. We have examined here the chart and the opera-
tions of economic circuits with credit money and foreign trade with
the rest of the world. The matured corporate industrial production
economy of the West continued to grow through its net exports to the
rest of the world with the consequent incidence of growing balance of
payment and fiscal deficits there. For the developed economies of the
West, the period 1945–65 was the golden period of economic growth
with apparently unhindered accumulation of financial capital through
creditisation and trade. However, it did not last long. Another crisis
was again brewing since the early 1970s with stagnating demand in
the real sector and declining labour productivity. We conclude this
chapter with analysing the cause of this new crisis and the consequent
necessity for another organisational evolution.
However, this organisational evolution did not come easily. Dur-
ing the period 1970–90, the world economic systems were in some
turmoil. Afterwards, the organisational evolutions of this stage came
to adapt to the information and communication technology (ICT)
revolution that started in the mid-1980s. The ICT revolution neither
generated from within the economic systems nor should be interpreted
simply as innovations in production technology to be reflected in rais-
ing productivity. We discuss in Chapter 2 that some economic studies
have tried empirically to find its reflections in productivity and got
paradoxical results, known as the Solow paradox (Triplett 1999).
The ICT revolution has created a new environment for business.
It has made possible, on one hand, instantaneous financial transac-
tions or virtual money flow through account or claim transfers across
the world and, on the other hand, globalisation of economic activities
through business process outsourcing. Thus, it has given birth to a
global financial web. To adapt to this change, the earlier economic cir-
cuits with corporate production of goods and services have undergone
a complex organisational evolution. Now a single global economic
circuit has emerged, in place of the earlier country-centric economic
circuits.
In Chapter 9 we examine the operation and implications of the global
economic circuit. The organisational evolutions at its background are
 Introduction 7
quite complex – there is now a new generation of financial commodi-
ties like derivatives and structured securities created by financial archi-
tecture; the process of securitisation creating special purpose vehicles
(SPVs); new financial markets – future and option trading exchanges –
and their regulatory bodies; new entities like hedge funds, private
equity funds, or foreign institutional investments; and corporations
and conglomerates dealing in diversified financials, their global net-
works, and their operations through the corporate havens. Besides
these, we see changes in the role of the banks and governments and
the coming legislation of new rules and regulations for companies and
banking, as well as changes in government tax and subsidy polices.
There are also changes in the business accounting norms and prac-
tices, like allowing marking to market of the financial assets and off-
balance sheet transactions. A reasonable discussion on all these would
require almost a book. We therefore keep a brief discussion on some
of these aspects in the Appendix, so as not to lose sight of the forest
for the trees.
We begin Chapter 9 with a discussion on leveraging as an impor-
tant operational aspect of the financial economy and then present the
chart of the global economic circuit combining the real and finan-
cial circuits as the final stage of evolution in our study. We mention,
first, that the global circuit is now a single economic circuit which is
engulfing the earlier country-specific circuits. This is the essence of
economic globalisation. Within the global circuit the earlier paradigms
of country-specific concerns – like foreign and domestic countries and
their interdependent production and trade structures, outsourcing
by one country to another and its implications for them, etc. – really
do not make much sense any longer, although these are traditionally
some important areas of economic studies. However, these issues exist
as globalisation is not complete yet. The global circuit has not yet
engulfed the entire world of economic activities. There are still some
local economic activities with financial transactions and savings which
are not directly linked to the global circuit. So the global circuit still
has an avenue to expand by linking these activities through financiali-
sation. We see its reflections in the financialisations that are now taking
place in the developing countries, particularly in the so-called emerg-
ing ones. In this context we have examined and kept in the Appendix a
note on financialisation in the Indian economy as reflected in growing
rentier income shares in India’s gross domestic product (GDP).
The second aspect of the global circuit is of particular significance.
Within itself the global circuit appears to be a closed single circuit.
It may be seen in the chart that we have kept no link to outside the
8  Introduction
circuit. Therefore, as happens in all closed economic circuits, there
should be the paradox of profits, since every gain must be accom-
panied by an equal amount of loss within the circuit. Nevertheless,
we make an important point here that the global financial circuit,
although a single one, is not a closed circuit. It has its opening to the
future, now created by securitisation, through which it treads upon the
future economic activities and brings them to the present for inflating
the current financial transactions and profits. This is, in fact, leverag-
ing banked upon debt financing. In all debts the debtors bear the liabil-
ity to be met in the future, which are the claims of the creditors on the
future. In other words, debts mean the debtors have sold their future
to the creditors. In addition, by securitisation of financial assets as the
store of such claims, the creditors get the opportunity to give further
loans and thereby leverage their claims on the future.
It may sound unacceptable if we say that in the financial economy
it is now the future that determines the present. Our common under-
standing is the other way around – from our present activities emerges
the future. But the financial economy has reversed it. When the future
is expected to grow, one can take loans to be repaid in the future out of
the growing earnings and use it in inflating the consumption or invest-
ment activities at present.
We have examined the operational implications of the global eco-
nomic circuit. The most important ones are: the growing concentra-
tion of wealth and income of giant corporations and HNIs; rising
capital intensity in spite of growing unemployment; stagnating growth
of production in the real sector and shifting production towards high-
end products shrinking the production of wage goods or basic items
of consumption; and, above all, the growing indebtedness of the gov-
ernments and the households (excluding HNIs).
Because of the nature of its economic construct it is inevitable that
the global economic circuit can now operate only through accumula-
tion of the corporate sector’s and HNIs’ wealth or net worth on one
hand and the matching accumulation of government and household
net debts on the other. We have commented that, theoretically, if it
were possible to calculate and construct a balance sheet of the global
financial economy, the four stocks would have been balanced – the net
government debt and household debts (excluding HNIs) as liabilities
and the net worth of the corporate sector and the HNIs as assets.
How long can these assets and liabilities keep on accumulating and
what would be its repercussions? A value judgement of this phenom-
enon and the questions of prediction are not in the objectives of this
book. However, we must point out the vulnerability of this system.
 Introduction 9
The digitalised global financial web with digitalised virtual money has
a highly fragile intricate network beyond any control of any govern-
ment or their international agencies. Any default or bankruptcy aris-
ing at any corner may spread like a wildfire. In the crisis of 2008 we
had just a glimpse of it, which could be tackled by bail-out packages of
the governments. However, now there are signs of sovereign debt crisis
also – even the governments may become bankrupt in more severe cri-
sis. What would happen then – who would bail out whom?
Piketty (2014) has suggested imposing a progressive global tax on
capital or wealth and far higher marginal tax rates on top incomes. In
his view, development of new forms of property and democratic con-
trol of capital are now needed. Piketty’s recommendations are quite
bold but may be a little unrealistic. Would the national governments
and their international agencies be able to implement this? Our expe-
rience so far – though on a different plane in reaching a consensus
through several summits on reducing the global greenhouse gas emis-
sions – does not give an encouraging answer.
What would happen then? Could our future have everlasting eco-
nomic growth? This is exactly what our economic present requires.
Our present now lives, not simply in the present, but on the future.
The future must therefore grow. If it fails to grow then an unabated
erosion of financial capital would start taking place in the system.
We conclude this book with an uncomfortable note – the present
as the future. Will there be another economic evolution in a new
direction, or a structural transformation at the foundation of our
current economic systems, or a situation hopelessly entangled in an
economic devastation? We apprehend that the evolutions in capitalist
economic systems are reaching the final stage with the global finan-
cial circuit – the end of its evolutionary path. Therefore, to avoid
economic devastation we focus on some structural transformations,
which may appear to be somewhat revolutionary. Would it be pos-
sible? The future will say.
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