02/04/11 Los Perros, Nicaragua – Facebook didn’t even exist until 2004. Maybe it’s just a fad. But it is a fad that the financial markets value at $50 billion. Mark Zuckerberg is now one of the richest men in the world. If he stole the idea, he is one of the most successful thieves in history. Google is another parvenu. It was created in 1998. Now it is worth $197 billion. Yahoo!, founded in the middle of the Clinton years, is worth $20 billion. eBay, which set up shop about the same time, has a market value of $40 billion.
Capitalism is a process of “creative destruction,” said Joseph Schumpeter. New wealth is created. Old wealth is destroyed. Unless the feds can make time stop, these great successes of today will be the great failures of tomorrow.
The “crisis in capitalism” is now in its 5th year. But where’s the crisis? Capitalism responds to demands that haven’t even been invented yet. We didn’t know we needed a Facebook, for example, and there it is. Whole new industries are growing up, worth trillions of dollars, with hundreds of thousands of well-paid employees, high margins and rapid growth rates. Capitalists are taking trillions of dollars from old businesses and re-allocating it to new ones. Emerging markets have grown 85% in the last 5 years, while mature markets have been flat. According to a McKinsey study, global investment is expected to jump from $11 trillion this year to $24 trillion in 2030 – with most of the money going to market economies that didn’t even exist 30 years ago.
Capitalism is destroying fortunes too. In the US household sector alone, some $7 trillion has been taken off housing values since 2006. And in the corporate sector, in terms of gold, US stocks have lost 80% of their worth over the last 10 years. The world’s erstwhile biggest automaker, GM, would have gone broke if it had been allowed to do so. Many of the planet’s biggest and most prestigious financial institutions would have been demolished too. We will never know for sure. Because just as capitalism was getting out its wrecking bars and sledge hammers, it was called off the job.
The financial crisis that began in 2007 was widely, and intentionally, misunderstood. People who were paid not to see it coming earned even more pretending to see it go away. Bankers, for example, made billions in fees for promiscuously mongering debt during the bubble years. Then, when the itching and soreness began, they profited from the quack cures. It was a “liquidity” problem, they said; “give us more money and the economy will recover!”
Politicians were happily bamboozled. They mislabeled the problem a “failure of capitalism.” Very convenient for the leveraged speculators capitalism was about to destroy. And very convenient too for the central planners who wanted to bring it under control. In 2009, magazine, for example, named Ben Bernanke its #1 Top Global Thinker, for his role in staving off another Great Depression. Without Bernanke’s decisive rescue, bankers who lent imprudently would have lost their jobs, failed economists would be parking cars, reckless investors and fund managers would have gone broke. Trillions in unpayable debt would have been written off. But thanks to Bernanke it’s still there! Thanks a lot.
First, the US Fed bought the banks’ bad mortgaged-backed securities – about $1.5 trillion of them from all over the world. Fiscal policies worldwide contributed $2.3 trillion more to the bailout. Altogether, the bill came to more than $7 trillion – not including the trillions in free money that came from central banks’ lending below the inflation rates – only to the big banks, of course.
The fix is in. And who knows how long it might go on? The Irish bail out their banks. The Europeans bail out the Irish. The Chinese bail out the Europeans. The Chinese bail out the Americans too, who also bail out the European banks. It doesn’t matter how broke you are. You can still be bailee or bailor. There seems to be no end to it. Why else would investors lend to the US government for 10 years at only 3.41%? Or to the Japanese government – with debt to GDP of 200% – at just 1.23%? As long as the money keeps flowing, insolvency has no meaning.
Government hates change. When a stranger comes to town, it calls the cops. That is its role, to protect the elites who control it. But adjustments need to be made. The US government alone faces a financing gap of more than $200 trillion. Every day the sun still rises. By the time it sets, another $4 billion has been added to America’s debt. But only phony “reforms” are put forward; Barack Obama’s proposed budget cuts would only reduce the US deficit by 3%.
The feds resist change. But change happens anyway. Were it not so, the Hohenzollerns would still be in power in Prussia, the Ottomans in Istanbul, Pharaohs would still rule the Nile and the Moguls would still sit on the peacock throne in India. And what happened to the Romanoffs, the Habsburgs, the Bourbons, the First Republic, the Second Republic, the Third Republic, the Forth Republic…the First Reich, the Second Reich, the Third Reich? Like dodos and dinosaurs, they did not adapt. They went extinct.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Isn’t it funny how those who rage against capitalism are its biggest beneficiaries. Pols and “academics” have been allowed to be lazy and inefficient on the backs of the productive whom they loathe.
Creative destruction is about to go into hyperdrive. People are beginning to realize that phony reforms are an illusion meant to placate them and prevent them from shrugging off the ruling classes of the world. The folks in the middle east have been the first to notice, but will not be the last.
The old order is crumbling before our very eyes and the first shots being fired are in the middle east. An event will happen there that will cause an earthquake in the old order in America. This will cause an awakening here and make much of our old foreign policy obselete. This will be bad for some, but will be good for many. Such is the nature of creative destruction. It didn’t have to come to this, but we reap what we sow as painful as that old adage is.
The U.S. is no longer in a position to police the world and our allies in many countries will suffer a terrible fate. Our power is useless and too many know of our enemies know this.
Remember the name Muqtada al Sadr. We should be hearing more about him in the next few years.
Why are the comments on this article not showing up?
Yes Bill, you hit the nail on the head in saying the Gov protects the elite.
Funny just today, another blogger (Charles Hugh-Smith) talked about how 1% of the population in the US owned 60% of financial assets. He nailed it too in saying
“the top 1% of the populace: that artifice results from specific tax and distribution policies established politically, not as a result of unfettered Capitalism or other “natural” distribution.”
We have an economic problem because we have an underlying political problem.
he said it all!
You are censoring comments
SHAME ON YOU Bill Bonner
Bill said:
And in the corporate sector, in terms of gold, US stocks have lost 80% of their worth over the last 10 years.
Yeah Bill, but we don’t measure the value of stocks in terms of ounces of Gold. We measure both stocks and Gold in dollars. That’s because it’s dollars and NOT gold that is our medium of exchange. For now at least.
Most stocks have not done much in the last ten years. But they certainly have not lost 80% of their real value.
Bill mentions Face Book is worth $50 billion.
And you know every time the value of Facebook has gone up it created wealth for its owners out of thin Air. How cool is that?
When any stock price goes up the value increase comes from thin air. But no one minds.
But for some reason you crap all over banks when they create money from thin air. And especialy when the Fed does it.
How about treating all “wealth from air” equally?
And where should wealth come from anyway? Earth, wind, water and fire perhaps?, but not air? (perhaps from thick smoggy air would be okay?)
$7 trillion in housing “value” may have vaporized to whence it came (thin air) but (with a few exceptions) the houses all still exist. Reckon on that!
Dude. When Facebook increases in value, that is based on actual present and projected future earnings. It’s not created out of thin air.
What is ANYTHING worth? What someone will pay for it. You can’t wish value into a thing out of thin air.
But when banks create money for QE: THAT is created out of thin air.
What’s worse, it’s created as DEBT which must be paid back – AGAIN: by the ACTUAL present or FUTURE earnings of the American people.
ACTUAL flesh and blood human beings have to give up actual THINGS of actual VALUE that they had to actually WORK for, in order to pay back the banks.
Each and every HUMAN BEING in America has been saddled with – in excees of $100,000 of extra debt (forget how much exactly)that they now have to pay back thanks to the TARPS and QE’s that they otherwise would have been able to use for things they actually VALUE.
Instead it was spent on… politicians and foreign banks near as anyone can tell.
seems The investors friend, has his panties all in a bunch.
”
Yeah Bill, but we don’t measure the value of stocks in terms of ounces of Gold. We measure both stocks and Gold in dollars. That’s because it’s dollars and NOT gold that is our medium of exchange. For now at least.”
You might not measure them in terms of gold but wise men always have and always will. Golds track record dates back thousands of years, you can like it or whine about it but those are the facts. What kind of track record can a Federal Reserve Note boast? 98 years 98% of its value lost.
Only an idiot would try to take an accurate measurement with something that changes as much as the dollar.
And for you to compare voluntary investments in a private company such as Face Book by consenting informed adults, with destroying the value of your own citizens currency via money printing without their knowledge or consent is so childish as to be embarrasing.
That my friend is grasping for straws.
Private individuals can believe that Face book is worth whatever they want to, that is their right, but they CANT force us to take that stock in exchange for goods and services, and That is a BIG distinction.
I enjoy healthy debate over issues however your posts seem to be trying to agitate, not inform.
It is interesting people like Wes read things and see what they want to see.
TIF: And you know every time the value of Facebook has gone up it created wealth for its owners out of thin Air. How cool is that?
That “wealth” is not real(ized) until they sell. And when they do someone else has to part with money. That monetized wealth does not come from thin air.
TIF: But for some reason you crap all over banks when they create money from thin air. And especialy when the Fed does it.
An increase in the price of a stock comes about through voluntary transactions that affect only buyers and sellers of the stock. Bank/Fed money creation affects the purchasing power of everyone’s money.
TIF: Yeah Bill, but we don’t measure the value of stocks in terms of ounces of Gold. We measure both stocks and Gold in dollars. That’s because it’s dollars and NOT gold that is our medium of exchange. For now at least.
Gold can be exchanged for dollars, which can then be used for whatever exchange purpose is desired. Hence his indirect point that you would would have been better off in gold than in stocks holds.
Wes,
I think you worry too much about the long-term loss in purchasing power of the dollar.
The dollar loses hardly any value in the time it is typically in a wallet or checking account (a day, a month a year).
Over longer periods of time and certainly over 98 years, people tend to invest their money so that it does not lose purchasing power.
Only an idiot would hold paper money in their matress for 98 years.
The fact is that dollars invested in stocks for the last 98 years have gained in purchaing power, not lost. And gained more than Gold too.
BUT, GOLD in a matress has done far, far better than dollars in a matress, no doubt about that.
But why would you fret about paper dollars losing purchaing power over a decade or century when no sane person keeps paper dollars in their matress and in fact can easily invest to beat inflation?
Fret less, and just concentrate on making money!
Dollars invested in stocks, bonds and even T-bills have beat inflation
Here are the facts since 1926. Again the returns shown are AFTER inflation.
http://www.investorsfriend.com/asset_performance.htm
But yes, yes, yes, money in the matress has lost a LOT of value since 1926.
Gold in the matress has about kept pace with inflation.
Gees, if Waren Buffett had got Berkshire to invest in Gold in 1965 he could have turned the $20 million worth of Berkshire into about 1380/35 or about $800 million. Pretty goo no? But he chose to invest in stocks and turned that $20 million into $100,000 million (and counting).
That’s why Buffett is no fan of Gold, ’cause he sees better opportunities.
And yes, Gold has done better than Buffett since it’s cherry picked low in about 2002, but certainly not over the long term.
Facebook, Google or Microsoft are isolated cases, sons of success of the human creativity. They total 50, 197 or 20b; regretably, the total sum resists a fraction of the national debt. Representation in any scale is a mere imagination.
Let’s us not talk about the Chinese or Japs bailing out the west in grand fashion.
“NOTE BELOWS ARE FICTIONAL AND IMAGINARY
STORY AND DO NOT TAKE IT SERIOUSLY”
Instead, the torchlight has it focus on an imaginary localised ideal social-economic environment. Where the zombies are strengthening each day and each night. Soon one will go under the zombies and the zombies get him to resolve the cashflow insolvency. The instant resolution is, if one can’t beat him then join him. OK. Zombies are no ordinary human beings but exceptional creatures from the outer space. Soon, the zombies ask the victim. Would you mind allowing your sons or daughters working in Bangkok’s redlight district so that insolvency could be alleviated? Out of nowhere, the victim try to test the bottom of the evolution theory and subsequently stress the theory to the limit.
The forgotten forefather once tried to overcome the bloodflow insolvency by red dripping the independence struggle, WW1, WW2 and countless tussles. Due to climatic
changes, the after generations easily overcome cashflow insolvency through diplomatic exchanges and compromises. That, effectively marks a new milestone.
Never has so few zombies owed to so few human beings!!!
nice story. they won’t ask, tho, they’ll just buy the children & ship ‘em out. slavery is as slavery does.
inv. fr. @ wes: “Only an idiot would hold paper money in their matress for 98 years.”
idiots should live so long! point well made, bruce, but how about all the intelligent people in 10 yrs. & 30′s @ 25-50% of the true inflation rate, conservatively? i know, they like the FACT that they can’t lose, but is it worth it? and where do the keep their iou’s? hmmm…
fret less is very hard to play, for me.
For the time being, just buy gold and silver till the actual doom. Doom strides in phases.
Quite often politicians go for the highest bidder. It will be my nightmare, when the days come, the reckoners are exhibited in the auction venue.
TIF: “When any stock price goes up the value increase comes from thin air. But no one minds.
But for some reason you crap all over banks when they create money from thin air. And especialy when the Fed does it.”
Congratulations. You have written what may be the dumbest four sentences I’ve ever read.
Try printing a few trillion Facebook stock certificates and let me know how much “wealth” you create. Hahaha!
Govt has a monopoly on the US dollar and you are required to use it. Big difference.
If a stock had declined 98% over the last 98 years you would say it was a horribly managed company. Think about that.
BB censors posts that puncture holes in his feeble opinions – a pity!
(This comment being printed proves nothing, but he only deletes those which explain in some detail how simple-minded his theories are.)
The 98 year decline in value of the dollar is of little importance since it is a risk that was so easily protected against.
For the record here is how stocks, bonds and treasury bills did AFTER inflation (i.e. after loss of purchasing power of dollar) since 1926.
Dollars invested in Stocks up 175 fold.
Dollars invested in long Bonds Up 5 fold.
Dollars invested in T-bills up almost 2 fold.
http://www.investorsfriend.com/asset_performance.htm
Dollars invested in Gold up 5 fold
Dollars stuffed in mattresses – Down 92% or so.
So, those are the FACTS. The loss of purchasing power in the dollar only hurt dollars held as paper and not invested in anything.
Why do I bother… (okay. it’s for my many fans…)
TIF: “Why do I bother?” My question too. Drug use or elitist background probably. I taught school for ten years, all the while raising a family and struggling to make ends meet. Eating always trumps investment and so investment is not an option for a tremendous number of people, thus they have no protection. After ten years and 50% increase in salary I was poorer than when I started. Why can I not benefit from salary increases without having to “protect” myself and my family from a “den of thieves”? At this later stage (my kids grown now) I have learned a thing or two about wealth. Silver I purchased less than two years ago is now doubled in price. Cash? Stocks? Not so much. Bill points out with necessarily broad brush strokes, the graft and theft which insidiously steals from the poor and gives to the rich. And he does so bravely, not making excuses. To excuse immorality and theft against one’s fellow humans because (for those well off) it’s “easily protected against” is to reveal that one is merely a coward and in denial about such. These are also “FACTS” as you would put it.