IASbhai Daily Editorial Hunt | 18th Jan
“The whole secret of a successful life is to find out what is one’s destiny to do, and then do it.” —Henry Ford
EDITORIAL HUNT #320 :“Financial Boom and Economic Stagnation | UPSC ”
Financial Boom and Economic Stagnation | UPSC
Sunanda Sen is a former Professor of Jawaharlal Nehru University, New Delhi
Financial boom at a time of economic stagnation
The paradox becomes clearer by recognising the circuit of financial flows beyond the real economy
SYLLABUS COVERED: GS 3 : Economy
What are the signs of a stagnant economy ? Explain the flow of finances in a volatile economy. -(GS 3)
- Stagnant Economies
- Advanced Economies
- Flow of finance
- Way forward
- STAGNANT REAL SECTORS : Divergences between the booming financial and the stagnant real sectors, which appear rather confounding as well as disconcerting, warrant an explanation.
- TRACKING SENSEX : Enumerating the facts in India’s major secondary stock market, the Sensex has been found tracking an upward path in the recent times.
- DOWNWARD SLIDES : In between, the temporary downward slides were responses to the pandemic-related lockdowns during early 2020.
- UPWARD STRIDES : Jubilant upward strides in the stock market continued, along with speculatory financial transactions in real estate, gold and even commodities.
- FINANCIAL GAINS : However, we notice that financial gains booked in the market on transactions do not originate from productive activities in the real economy.
- DECLINING GDP : GDP in India has been subdued even before the pandemic, declining from 6.12% in 2018 to 4.18% for 2019, while the financial sector has continued moving up.
IN ADVANCED ECONOMIES TOO
- CONTINUED STAGNATION : The paradox of the continuing financial boom with the real economy going through a stagnation has been found to be replicated in other developing as well as advanced economies.
- UNEMPLOYMENT : Simultaneously, the story of employment in countries has been dismal, with jobs at levels much less than what is needed .
- DARK SIDE OF THE ECONOMY : Several other factors are also impacting— these include the uprooting of migrants following the pandemic lockdowns, protesting farmers on land rights etc.
FLOWS OF FINANCE
- FICTITIOUS CAPITAL : Finance as above, having no counterpart in the productive sector, was identified, first by Karl Marx, as fictitious capital.
- MONETIZATION : Earnings from fictitious capital include interests, dividends and capital gains as well as profits on derivatives such as forwards and futures used to hedge against uncertainty in de-regulated markets.
- RENTIER CAPITAL : All the above come in the category of unearned or rentier capital.
- FLOW OF FICTITIOUS FINANCE : Despite the fact that flows of fictitious finance do not originate from the real economy, their accumulation, however, leaves a mark by generating financial wealth for those with access to the financial circuit.
- ACCUMULATION OF ASSETS : Evidently, possibilities of accumulating assets turn even brighter with the high value assets (used as collaterals), fetching credit for further business.
- STOCK PRICES : As for the stock prices, which reflect the stream of dividends over time discounted by interest rates, lower rates can help pitch stock prices higher.
- We recall that cuts in interest rates are often preferred as tools under mainstream prescriptions limiting expansionary policies, which evidently helps stock prices.
- MARKET CONFIDENCE : A journey as above for the financial circuit continues, is subject to market confidence, along a concentric circle which widens with rising asset prices, asset incomes and capital gains.
- CALCULATIONS OF POSSIBILITIES : The standard computer-run packages in the market available for investment decisions, while based on the rather erroneous calculation of probabilities, fail to work to attain the desired goals of profitability.
LINK TO STATE
- PATH OF FINANCIAL DEREGULATION : The path started with the sweeping pace of financial de-regulation in the late-1990s when banks were allowed to profit by dealing with securities and with the emergence of hedging devices such as futures and options in the market.
- SHADOW BANKS : It also reflects the rise of non-bank financial institutions as well as shadow banks operating beyond regulations even at cost for the regular banks which had large exposures to the non-banks.
- REAPING BENEFITS : The state’s close proximity to big finance is also evident in the revamping of downhill finance, even with bailouts in the name of restoring financial stability.
- PRO FINANCE STANCE : It speaks even more of the pro-finance stance of the state in the benign official neglect of upswings in the financial sector despite the continuing downslides in the real economy.
ALTERNATIVE POLICIES, CAUTION
- Possibilities of a sudden collapse of confidence in the financial sector, incurring financial losses borne by those holding such assets go further with social costs borne by the economy as a whole — a reality which cannot be ignored.
- Catastrophes, as mentioned above, highlight the need for alternative policies on the part of the state as well as a bit of caution on part of individual investors — in a bid to usher equitable path of growth for the economy as a whole.