There is a growing gap between the headline performance of the economy as seen in the London Stock Exchange and what more and more people report as their own economic position and the financial stresses and worries which they carry.

The vast wealth of the UK economy is not being experienced as such by most people. GDP may increase, the stock market may rise, but for many there is only the growing squeeze on incomes and the accumulating debt burden.

Part of the explanation for this gap is the hidden economic process of financialisation, by which financial flows are diverted away from production and consumption toward asset markets in the pursuit of capital gains.

Financialisation is not yet widely enough understood, even as it becomes the increasingly damaging force behind the extractive economy and its consequences for workers, society, and the natural world.

Financialisation is a complex phenomenon, but has enormous explanatory power as to the causes of Britain’s highly unequal and dysfunctional economy of growing poverty in the midst of plenty.

Far from boosting productivity and increasing efficiency in the non-financial economy, the growth of the financial sector functions as a subtraction from the real economy, as financial flows are diverted to unproductive uses and the resulting revenue flows benefit a minority.

As financialisation gathers pace, rising wealth and debt detract from income for the majority.[37] In such an economy, what is counted as growth matters a great deal. Every financial asset is at one and the same time someone else’s financial liability – and as the holdings of the financial sector have increased, so too has the debt held by households and businesses in the non-financial economy.

This dynamic goes by the name of assetisation, which is “the creation of assets and liabilities out of future economic activity.”

As Dirk Bezemer, Michael Hudson and Howard Reed describe assetisation in a paper produced for The Democracy Collaborative:

“Students’ future incomes are capitalised into student loans, households’ into mortgages. Future mobility is capitalised into car loans, future pensions into pension assets, future profits into equity. Each of these assets is held as a liability by the issuer, who must service it out of their incomes, both wages and profit, by paying interest, dividends, contributions to pensions and social security. This extraction constitutes ‘savings’ in the sense of non-consumed income. But… these ‘savings’ are not necessarily supporting production. They are payments for debts and to gain access to utilities, education, infrastructure and other necessities that have been turned into assets requiring a return. Basic necessities are redefined as assets, whose price is inflated by the liquidity poured into asset markets. This is the new ‘circular flow’ logic of the capital gains economy.”[38]

The result, our economists point out, is “lower disposable incomes, even before taxes. For instance, rents increase when house prices rise. Water utilities are turned into privately traded assets; then the fees are increased to pay for the increased asset costs. Firms are acquired on debt; then disposable wages fall, after servicing the new debt liabilities. As income growth declines to generate capital gains to asset owners, this adds to the attractions of holding assets. Increasingly, income inequality comes to be defined by the dichotomy between the haves in asset markets, who reap capital income and capital gains, and the have nots, who service the liabilities that make capital income and capital gains possible.” [39]

This process of financialisation in pursuit of capital gains helps explain the squeeze-play of recent years, whereby nominal economic growth has in reality been experienced as reduced income through increased extraction and indebtedness.

The data show the powerful development of financialisation in the UK.

Between 1995 and 2020, nominal wages doubled, nominal UK GDP rose two and a half times, while average house prices quintupled and the valuation of financial assets rose four and a half times.

The benefits of Britain’s “capital gains economy” are revealed as flowing primarily to asset-owners and the already wealthy, while for the rest of us there are lower earnings from work, lower income growth in the non-financial sector, lower productivity, and less innovation – all alongside sizable increases in debt and (conversely – as every debtor has a creditor) in financial and real estate wealth.

The financial sector is extractive from the real economy.

Given that all income groups are paying ever more into the finance sector in fees and interest charges and for underlying assets while the payouts from the sector are even more concentrated than those of the economy as a whole, the finance sector has also become the locus of the production of increased inequality in the UK economy.