On the Destructive Part of Capitalism

When we are in a thoughtful mood, we try to get out of it as soon as possible. Nothing like thoughts to trouble a man’s sleep.

But sometimes a thought gets a grip on us and we can’t get rid of it until we’ve meditated, prayed, and drunk a whole bottle of Bordeaux.

Thus it was that we were puzzling over the strange events of the last few years. Why was Ireland so desperate to save its banks? Why did the US rush to keep Fannie and Freddie out of juvenile detention? Why put at risk the entire world financial system in order to try to get US employment down from 9% to 6%?

People have a deep-seated fear of capitalism, we conclude. They will do almost anything to avoid it. Capitalism works by “creative destruction.” They’re happy with the creative part. But they can’t bear the destruction. Ireland’s biggest banks go broke? No way! America’s leading housing lender in Chapter 7? We can’t let that happen!

They imagine that the “destructive” part of capitalism is a kind of disease or mechanical breakdown. If must be something that can be fixed, they conclude. And so they look for the cure…the fix…the solution.

They must realize that adding paper money to a society that is already saturated in debt is a rather far-fetched solution. But what else can they do? They tried the elixirs and the home cures. Monetary stimulus didn’t work. They tried fiscal stimulus, too. And even after the biggest stimulus of all time what have they got? Nearly 10% unemployment, falling house prices, little or no real (non-government) growth, falling incomes, and consumer price increases that are the lowest ever (if you take the figures at face value).

What do they have left but “unconventional” methods. And so what if they don’t really make any sense. You gotta do something, right?

The simpleminded morons.

“Corporate profits are the highest on record,” says the latest news. Some investors take this as good news. But if profits are already the highest on record…how likely is it that they will go higher?

The high margins probably result from the weakness in labor costs. Businesses were startled by the downturn of ’07-’09. They cut costs (employees) quickly. So far, they’ve been reluctant to hire people back. That leaves the poor ex-employee without a job, but it also leaves the business with a decent bottom line.

But after you’ve cut expenses, what do you do next? If you’re going to add to your profits you have to count on growth in revenue. So, where are these extra sales coming from?

Most likely, sales growth will be very slow…and profits will inevitably decline from these all-time highs. Falling profit margins will be another reason to get rid of stocks, so stock prices (and p/e ratios) will probably fall.

Bill Bonner
for The Daily Reckoning