Misunderstanding Capitalism

As expected, the euphoria died overnight. On Wednesday, the Dow was up nearly 500 points. Thursday, it fell 23 points.

More and more people are coming to the same conclusion. The bull market is a fraud. And the system is corrupt. And they’re right. But not for the reasons they think.

Here is Number One on the “Capitalism as we know it doesn’t work” hit parade. From Forbes:

Top 0.1% of the Nation Earn Half of All Capital Gains

The top 0.1% — about 315,000 individuals out of 315 million — are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.

It’s crystal clear that the Bush tax reduction on capital gains and dividend income in 2003 was the cutting edge policy that has created the immense increase in net worth of corporate executives, Wall St. professionals and other entrepreneurs.

The reduction in the tax from 20% to 15% continued the step-by-step tradition of cutting this tax to create more wealth. It had first been reduced from 35% in 1978 at a time of stock market and economic stagnation to 28%. Again 1981, at the start of the Reagan era, it was reduced again to 20% — raised back to 28% in 1987, on the eve of the October 19th — 23% crash in the market. In 1997 Clinton agreed to reduce it back to 20%, which move was an inducement for the explosion of hedge funds and private equity firms — the most “rapidly rising cohort within the top 1 per cent.”

Make no mistake; the battle that is to be fought over the coming attempt to reverse this reduction in capital gains will be bloody and intense.

…the super wealthy plutocrats obtained the largest share of national income — 25% of the nation’s wealth — greater than any other industrial nation in the period of 1979 to 2005.

Pretty soon some enterprising journalist will publish the names and addresses of these super-rich people. Then, lynch mobs will form out in front of their houses.

Not that there is anything wrong with getting rich. And nothing wrong with a 15% capital gains rate. In fact, we rather like it that way. But people are looking for someone to blame for their troubles. And they’re not likely to identify the real culprits. That would take too much time and thought.

So they point the finger at the “rich”…

They’re right, of course. The system is corrupt and degenerate. But it’s not because of the 1% or the 0.1%… Nor is it because the feds passed deregulation legislation. Nor because tax rates are low. Nor because corporate CEOs are greedy. Nor because capitalism isn’t up to the challenge.

But even The Wall Street Journal misses the point. Here’s Number Two on the “Capitalism as we know it doesn’t work” hit parade, an article that explains why China’s economic model is superior to America’s supposedly free market system.

China’s Superior Economic Model
The free-market fundamentalist economic model is being thrown onto the trash heap of history.
By ANDY STERN

Andy Grove, the founder and chairman of Intel, provocatively wrote in Businessweek last year that, “Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best of all economic systems — the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.”

…I was part of a US-China dialogue — a trip organized by the China-United States Exchange Foundation and the Center for American Progress — with high-ranking Chinese government officials, both past and present. For me, the tension resulting from the chorus of American criticism paled in significance compared to reading the emerging outline of China’s 12th five-year plan. The aims: a 7% annual economic growth rate; a $640 billion investment in renewable energy; construction of six million homes; and expanding next-generation IT, clean-energy vehicles, biotechnology, high-end manufacturing and environmental protection — all while promoting social equity and rural development.

Some Americans are drawing lessons from this. Last month, the China Daily quoted Orville Schell, who directs the Center on US-China Relations at the Asia Society, as saying: “I think we have come to realize the ability to plan is exactly what is missing in America.” The article also noted that Robert Engle, who won a Nobel Prize in 2003 for economics, has said that while China is making five-year plans for the next generation, Americans are planning only for the next election.

The imperative for change is simple. As Andy Grove pointed out: “If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.”

Right! Just what America needs… More central planning. More bureaucrats. More zombies!

One big disappointment during the crisis of ’08-’09 was that you could stand on the corner of Broad and Wall without risking getting crushed by a falling body. There were scarcely any suicides. Few people were disgraced. Even fewer did themselves in.

This can partly be explained by the lack of double-hung windows in lower Manhattan. Fixed glass forces suicidal people off the window ledges and into tawdry bathrooms where they have to slit their wrists ignominiously.

The other explanation is even simpler: the fix was in.

As we keep pointing out, if capitalism had been allowed to do its stuff during the crisis of ’08 and ’09 we wouldn’t be having this conversation. The Dow would probably already be at about 6,000…and the rich would have lost about $10 trillion in bankruptcies, defaults, sell-offs and write-downs. We wouldn’t have the Bank of America or Goldman Sachs to kick around — they probably would have gone out of business.

That’s what crises are for…to separate fools — especially rich fools — from their money. The rich lose much more money than the poor…because they have so much more to lose.

Remember our zombie theory.

Everybody wants wealth, power and status. (The rich are just better at it.)

They want to get it in the easiest possible way.

And the easiest way is to take it away from someone else.

That’s what government does. It allows the rich to get rich…supporting their stocks and real estate holdings with artificially low rates and expandable paper money. Then, when the rich go too far, it bails them out with even lower rates and even more ersatz paper money. The rich get their dividends; the politicians get their sinecures and campaign contributions; the middle classes lose their jobs, their houses, and their standards of living.

The masses never even try to figure this out. They only know that the game is rigged against them…and they get angry.

In anticipation, the government prepares to deal with its revolutionaries just as it deals with “insurgents” in Afghanistan or Iraq. The military, you will remember, is not learning how to win real wars. It learning how to hold down ‘terrorists.’ Today, the terrorists are in the Middle East. Soon they will be in the Midwest. Here’s the Business Insider:

The New National Defense Authorization Act Is Ridiculously Scary … Fellow entrepreneurs, Americans, anyone who still cares about this country at all — this is a must read: By the end of this week, the US government very likely will have the power to lock up US citizens for life at Guantanamo Bay or other military prisons — without charge and without trial. This means that, in the near future, a controversial Twitter post, attending a peaceful protest, or publishing an anti-Congress critique or anti-TSA rant on Google+ could land you “indefinite detention” for life, in the wording of the bill. No access to a lawyer, no access to trial.

Yes, dear reader, corruption leads to discontent. Discontent leads to rebellion. Rebellion leads to repression.

Regards,

Bill Bonner
for The Daily Reckoning