MONETARY EVOLUTION BACKED BY ECONOMIC GROWTH

Since the end of WWII, global wealth and the liquidity of the world's financial exchanges have grown at an extraordinary pace. The money required to handle the corresponding increases in industrial output, service sector productivity, expanded financial exchange activity and the concurrent need to post this wealth into corporate financial statements all depends on the capability to enhance both the nominal value and availability of the world's monetary pool.

This, in turn, raises the inevitable challenge of how best to fulfil the requirements in question. The answer is to simultaneously increase the monetary volume while concurrently reducing the requested need for money – in part by accelerating financial transactions and expanding their volume (the latter in large part by augmenting monetary velocity and improving flow efficiency inside the system). Thus, fluidity and volume are key targets, provided that their accurate measurement can be determined and the required processes to attain these objectives effectively developed.

DEVELOPMENT OF A GLOBAL FINANCIAL MARKET ECONOMY

The contemporary financial exchange-based market economy that we live with is enduring a growth crisis. Relevant data are necessary to understand the scope and dimensions of historical and recent developments.

Between 1970 and 2011, the gross domestic product (GDP) of the USA increased 15-fold, that of France 21-fold and the estimated Chinese GDP grew by a multiple of 51.[1] With almost 1.4 billion inhabitants, China reached only half of the actual US with 9.2 billion versus 16.8 billion for US with 310 million inhabitants (IMF data). However, in terms of dollar valuation, the achievement is far greater when characterized by bargaining power parity. In fact, following only a few years of exponential growth, China has become the world's second-largest economy (see Figure 2.1).

This pattern of accelerating GDP growth is a recent phenomenon. Historians usually consider that the standard of living on the globe remained unchanged from antiquity up until the 18th century. Furthermore, and until the 1970s, this phenomenon was mostly limited to western economies – aside from isolated and uncommon exceptions, such as Japan.

A historically derived economic analysis will point to various determining factors that favour the growth of predominantly market-driven economies, including: economic freedom, free enterprise, freedom for the exchange of ideas and commercial goods, as well as the right of individuals to travel freely. Over time, the liberalist model of a market economy has repeatedly overwhelmed authoritative political regimes incapable of integrating market

Face value of GDP in trillion dollars (after adjustment for buying power)

FIGURE 2.1 Face value of GDP in trillion dollars (after adjustment for buying power) Source: Authors' creation.

forces. When a people sharing the same culture and common roots have been separated into two adjacent nation-state entities, one with a centralized economy and the other with a market economy – as occurred with Germany and Korea – the state with the market economy has experienced stronger and more rapid sustained growth.

The growth in GDP parallels the evolution of other parameters: growth in household wealth, development of international trade and interaction between markets, as well as commercial monetization of economies.

The growth in household wealth is particularly evident in western countries with so-called developed economies. For instance, according to the INSEE,[2] wealth in France for a household represented 8 years of net available income in 2012 compared with only 4.4 years during the period 1978-1997. Unprecedented growth is also a recent phenomenon in the great emerging countries, including India and China. The urban Chinese middle class (income over RMB 25,000 ($5400)) represents 19% of the urban population compared with less than 1% five years earlier, with a growth rate of 25 million inhabitants per year. In India, the middle class (annual income of $4500) was on the order of 50 million in 2007; the McKinsey Global Institute estimates that it will grow to 580 million by 2025. In most countries, household assets are growing faster than GDP, and thus represent most of the observed increase in progressive enrichment.

In France,[3] the number of households retaining a stock portfolio increased from 1 million in 1978 to 12 million in 2007. For many developed, western economies this rise in financial wealth relates to the transition from a growth-based economic model to an economic model where an aging population expects additional income from capital accumulation that this segment of the population does not generate, develop or otherwise contribute to on an active wealth generation basis. In most developed countries, this trend has triggered a reorientation of savings asset deployment towards “ostensibly safe” financial instruments, thereby disregarding more risk-prone industrial investments.[4]

This pattern corresponds to a different allocation for GDP within such nations, leading to more emphasis on monetary transfers and to a larger role for currency-based assets. For instance, additional growth in savings led banks widely to increase their lending activities – supported by new high-yield financial products, including “sub-primes”, which were originally claimed to be risk-free instruments. The proportion of worldwide financial assets compared with GDP reached a peak in 2007, with over $300 trillion compared with a world GDP of over $57 trillion.[5]

With regard to the global capitalization of market-listed companies, the ranking of banks has grown substantially and the weight of the financial sector now carries an ever-growing position in the composition of western GDP. Unlike the manufacturing sector, the market share for the service sector has experienced robust growth and, until 2000, the fractional GDP contribution from financial assets alone continued to increase – such growth has been fed by the development of financial transactions between residents of developed western economies.[6]

International comparison of the evolution of household wealth

FIGURE 2.2 International comparison of the evolution of household wealth

Source: OECD. 18-Dec-2012 – COM/STD/DAF (2012)8

Beginning in the 1980s, the growing interaction between an increasing number of national economies contributed to this dynamic of world economic growth, as did the emergence of new players with now predominating influence, the penultimate example being China.

Regarding the US the financial crisis of 2007, an April 2013 release from the Federal Bank of St. Louis[7] shows that 115 million households in the USA have not fully recovered in terms of net value, and we can see that real estate is their main asset while the partial recovery of 91% (with growth in number of households the figure is reduced to 81%) of 2007 values for the middle classes is due to an increase in share values. International comparisons are to be taken cautiously because they depend on asset classes, governmental interest, quantitative monetary policies and social set-ups, all of these being subject to further analysis about the “value” effect but certainly impacting consumption and savings (see Figure 2.2).

The growth of international trade is also noteworthy, as it not only reflects the development of globally interconnected market economies but also the interdependence of currency zones and both domestic and transnational enterprises operating within these zones. As shown in Table 2.1, the transactional volume of financial market exchanges has increased 14-fold since 1950.

This table evidences the fantastic growth of exports and exchanges that has outpaced overall growth in GDP during the historical period since WWII. It also reflects the globalization of the economy and the progressive internationalization of enterprises,[8] as many corporations have expanded to a transnational presence or in terms of their market position. The data also highlights changes in the relative strengths of regional economic systems, reflecting the emergence of Asia

TABLE 2.1 Export of merchandise (billion dollars and percentages)

1948

1953

1963

1973

1983

1993

2003

2012

World

Value

59

84

157

579

1838

3677

7380

17,930

World

Share

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

North America

28.1

24.8

19.9

17.3

16.8

18.0

15.8

13.2

United States

21.7

18.8

14.9

12.3

11.2

12.6

9.8

8.6

Canada

5.5

5.2

4.3

4.6

4.2

3.9

3.7

2.5

Mexico

0.9

0.7

0.6

0.4

1.4

1.4

2.2

2.1

South and Central America

11.3

9.7

6.4

4.3

4.4

3.0

3.0

4.2

Brazil

2.0

1.8

0.9

1.1

1.2

1.0

1.0

1.4

Argentina

2.8

1.3

0.9

0.6

0.4

0.4

0.4

0.5

Europe

35.1

39.4

47.8

50.9

43.5

45.3

45.9

35.6

Germanya

1.4

5.3

9.3

11.7

9.2

10.3

10.2

7.8

France

3.4

4.8

5.2

6.3

5.2

6.0

5.3

3.2

Italy

1.8

1.8

3.2

3.8

4.0

4.6

4.1

2.8

United Kingdom

11.3

9.0

7.8

5.1

5.0

4.9

4.1

2.6

Commonwealth of Independent States

(CIS)b

1.5

2.6

4.5

Africa

7.3

6.5

5.7

4.8

4.5

2.5

2.4

3.5

South Africac

2.0

1.6

1.5

1.0

1.0

0.7

0.5

0.5

Middle East

2.0

2.7

3.2

4.1

6.8

3.5

4.1

7.5

Asia

14.0

13.4

12.5

14.9

19.1

26.1

26.1

31.5

China

0.9

1.2

1.3

1.0

1.2

2.5

5.9

11.4

Japan

0.4

1.5

3.5

6.4

8.0

9.9

6.4

4.5

India

2.2

1.3

1.0

0.5

0.5

0.6

0.8

1.6

Australia and New Zealand

3.7

3.2

2.4

2.1

1.4

1.4

1.2

1.6

Six East Asian Traders

3.4

3.0

2.5

3.6

5.8

9.7

9.6

9.7

Memorandum item: EUd

24.5

37.0

31.3

37.4

42.3

32.4

USSR (former)

2.2

3.5

4.6

3.7

5.0

-

-

-

GATT/WTO memberse

63.4

69.6

75.0

84.1

78.4

89.3

94.3

96.6

a Figures refer to the Federal Republic of Germany from 1948 to 1983.

b Figures are significantly affected by including the mutual trade flows of the Baltic States and the CIS between 1993 and 2003.

c Beginning with 1998, figures refer to South Africa only and no longer to the Southern African Customs Union.

d Figures refer to the EEC(6) in 1963, EC(9) in 1973, EC(10) in 1983, EU(12) in 1993, EU(25) in 2003 and EU(27) in 2012. e Membership as of the year stated.

Note: Between 1973 and 1983 and between 1993 and 2003 export shares were influenced significantly by oil price developments.

Source: WTO international trade statistics 2013 (wto.org).

and the rapid decline of the US A. The relatively stable initial ranking for Europe is multifactorial, that is the initial success of post-WWII recovery serves to statistically obscure the impact of subsequent intense exchanges within a single, unified EU market leading up to 2010. Since 2011, interstate commerce within the EU has been neutralized, reducing the uptrend rate but still showing European resilience within its world trade market share. In contrast to its continuation within the ALENA inter-trade, which was not neutralized, the reduction of the US share in the world exchange in favour of Asia is obvious. As noted by Pascal Lamy, former General Manager of the WTO, these statistical trends still fail to reflect the worldwide expansion of several major companies[9] as monetary measurements that impart substantial economic weight.

Within the USA, household wealth and its components can easily be appraised (see Table 2.2). In 2007, 93.3% of families held at least one type of financial asset – 52.6% having retirement accounts and 17.9% holding equity stocks. Households in possession of benefit accounts realized returns of only 37.9% in 1992. The growth in retirement accounts reflects the aging population and the changes in both distribution and utilization of wealth. During the same period, growth in private holdings of stock increased by only 1.0%. Even more demonstrative is the growth of (nominal) wealth, evolution assets and liability allocation. Although total wealth increased 57-fold between 1952 and 2010, not surprisingly a significant fraction of this growth is concentrated within pension plan reserves that represent 27.3% of overall wealth (a 39.5-fold increase). As for home mortgage liabilities, these increased 173-fold during the same 58-year period. If we compare financial assets between 1952 and 2012, from 830 million they reached 47,739 billion (a multiplication factor of 57).

TABLE 2.2 Wealth of households and non-profits in the USA

1952

%

1972

1992

2010

%

Total financial assets

830

100

3,220

16,906

47,639

100

Deposits (including money market)

143

17.2

766

3,281

7,931

16.6

Credit market instruments

105

12.7

255

1,886

4,355

9.1

Corporate equities

151

18.2

921

3,094

8,514

17.9

Pension fund reserves

33

0.4

349

4,139

13,025

27.3

Equity in non-corporate business

322

38.8

783

2,899

6,251

13.1

Total liabilities

98

11.8

583

4,122

13,918

29.2a

Credit market instruments

94

11.3

555

3,970

13,357

28b

Home mortgage

58

7

343

2,840

10,070

21.L

a Bureau of Census gives 23.5%. b Bureau of Census gives 22.6%. c Bureau of Census gives 15.5%.

Source: Table 1169 US Census Bureau extract. 11

  • [1] Source: Data.worldbank.org.
  • [2] French Governmental Statistical Office. See Glossary.
  • [3] Updated figures for France as well as comparable figures for the USA have not been found. Pension plans (401 (k)s and others) only exist in the USA.
  • [4] Filippi, C.-H., L'argent sans maître. See References.
  • [5] McKinsey Global Institute (MGI) report of March 2013 on “Financial Globalization: Retreat or Reset".
  • [6] Bulletin de la Banque de France no. 175, 1st trim. 2009.
  • [7] Emmons, W.R. and Noeth, B.J., Issue 4-2013, Short essays related to research on understanding and strengthening of the balance sheet of Americans households.
  • [8] The WTO 2009 report also contains developments on the transformation of international trade because of the rise in integrated groups that would partially explain the more than proportional to GDP growth of exchanges for the period 1948-2009.
  • [9] On June 6. 2011. Pascal Lamy. General Manager for the WTC at that time, declared: "Trade expressed in value-added is a better (than gross amounts) measurement of world trade. By focusing on gross value of exports and imports, traditional trade statistics give us a distorted picture of trade imbalance between countries. The picture would be different if we took into account, how much value added is embedded in these flows." Since 2013, the WTO gives some insights on value added per country allocation carried with trade exchanges in its report.
 
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