The Financial Times led off its series on ‘Capitalism in Crisis’ with a wandering piece that attempted to outline the problem. Unfortunately, the FT writers don’t seem to understand what capitalism is, let alone what is wrong with it. They say they are “rethinking capitalism.” But it doesn’t appear that they ever thought about it the first time.
“At the heart of the problem is widening income inequality,” they write.
Anatomically, income equality is right on the surface…not at the heart. It is more like warts or boils…on the skin of the system for all to see. Right out in the open. The question is what causes these blemishes… More in just a minute…
First, let’s look briefly at what is going on in the markets. A quick preview — nothing much. The Dow rose 69 points yesterday. Gold shot up $23.
Meanwhile, The Wall Street Journal tells us that consumers have begun to borrow again:
Consumer borrowing leapt as holiday spending kicked in late last year, according to a new Federal Reserve report that hinted the era of household debt reduction that has held the economy back for years might be entering a new, milder phase.
The Fed said Monday that household borrowing on credit cards, car loans, student loans and other kinds of installment debt rose at a 9.9% seasonally adjusted annual rate in November, the fastest monthly increase since November 2001. That was when the economy was bouncing back from the Sept. 11 terror attacks and Detroit car companies were rolling out zero-percent…
Whoa… Does this mean the Great Correction is over? Have households decided to go back to their old free-borrowing, free-spending ways? Is it 2005 all over again? Let’s hold that question…
What are consumers doing? Are they taking their cue from the US government? USA Today reports that federal debt is now as big as the entire economy. That is, we have a government debt-to-GDP ratio of 100%. And only if you don’t count the rest of government’s debt — such as the debt of Fannie and Freddie, and unfunded pension debt, as well as state and local obligations. Add them to the calculation and the ratio jumps to high heaven.
Fortunately for the feds, they have no trouble borrowing money. Bloomberg reports that there are plenty of people willing to give the Treasury more rope:
The Treasury attracted record demand at today’s $32 billion auction of three-year notes as concern that a resolution to Europe’s sovereign-debt crisis is far off drove investors to the safety of the securities.
The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 3.73, the highest since at least 1993, when the government began releasing the data. Yields on US debt securities were little changed. German Chancellor Angela Merkel was meeting International Monetary Fund Managing Director Christine Lagarde as pressure grows to complete a Greek debt resolution.
“There is still strong risk aversion in the market,” said Adrian Miller, fixed-income strategist at Miller Tabak Roberts Securities LLC in New York. “There is still enough headline risk out there that it should keep the Treasury market relatively in check and in this very narrow range.”
The yield on the current three-year note was little changed at 0.36 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices.
How do you like that, dear reader? Lend money to the world’s biggest debtor…who has no plausible plan for ever paying off these debts…and get a paltry third of a percent on a three-year note. Pretty soon, you’ll have to pay to lend the feds money.
Is that strange, or what?
And now let’s return to the “Crisis in Capitalism”…
In 1965, US chief executives received 24 times the wages of the average worker. Over the next 25 years, the ratio went to 70 times. Then, it exploded to the upside, rising to 299 times in 2000 and 325 times today. People look at these figures with the same look of appalling disgust as they once looked at syphilitics. It is ugly, the outward sign of an inner sin, they believe.
But it is hardly the heart of capitalism. Nor the liver. Nor the kidneys. Nor any other vital organ. Executive pay is not a benefit to capitalism. It’s not what makes the system works. It’s a cost. A drag. An impediment. It’s only a benefit to a very special segment of the working class, the managers. They are the cadres…the insiders…the controllers. More like plantation overseers and prison wardens than capitalists, their interests are very different from either the working stiffs or the shareholders. They squeeze the former and cheat the latter. They cut costs…deliver profits…and pay a large percentage of them to themselves.
According to John Kay, also writing in the FT, a breach opening between capitalists and managers was observed as early as the 1930s. The capitalists still owned the capital. But the managers controlled it.
“Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital,” Kay explains. “They have obtained these positions through their skills in organizational politics, in the traditional ways bishops and generals acquire positions in an ecclesiastical or military hierarchy.”
They are bureaucrats, in other words…glad handlers…schmoozers…not entrepreneurs or capitalists. And over time, like major domos, regents, and regisseurs, they use their control of the institution for their own benefit.
How do they get away with it? It is a part of the process we call ‘zombification.’ Institutions all tend to shift, over time, from fulfilling some outward-centered purpose — such as making bread or making war — to looking out for themselves. Whether it is a government or a corporation, hustlers, anglers, and idlers figure out how to take advantage of them. These ‘insiders,’ pervert the organization and divert its power and money to themselves.
The club secretary, the company president, the charity director, the dictator and the senator…all look for ways to build their own power and wealth. National economies are undermined. Whole industries are corrupted.
We thought the idea was somewhat original. We thought we had come up with something new. But once again, Mansur Olson, a professor of institutional economics at the University of Maryland, was way ahead of us. He described the process as it applies to government in his 1982 book, The Decline of Nations. His view of it was a little narrower and more responsible than ours. He described how lobbyists and special interest groups corrupted the government and the economy. Businesses — protected, subsidized, heavily regulated — became inefficient. Real output per unit of investment went down. The nation declined.
We’ve already seen how in the US, the health care, education and defense industries have been thoroughly zombified. Huge amounts of money have been “invested” in these industries over the last four decades. Despite all the money, people are statistically no healthier…and no better educated. As for defense, military lobbyists insist that we are safer. But never have so many foreigners had a grudge against America.
Bill Bonnerfor The Daily Reckoning
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.
“We’ve already seen how in the US, the health care, education and defense industries have been thoroughly zombified.”
Yes, but the ‘defense’ industry was never about defense, to begin with.
I don’t think that industry has been corrupted. The military has always dealt with robbery and murder on an ‘industrial’ scale…
CAPITALISTS VERSUS MANAGERS:
Adam Smith was on this about 236 years ago stating:
The managers of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they would watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.
Negligence and profusion , therefore, must always prevail, more or less, in the management of the affairs of such a company.
from Wealth of Nations, Book V, Chapter 1, Particular Branches of Commerce
There has been progress in these 236 years. These days the managers are pretty much convinced it is actually their money. Shareholders are treated as outside parties. Shareholders are viewed to be transient owners of a share not as the true owner of the company. That are not even called share owners, just share holders.
I read on the global research website that the 4 big banks of the insiders in America, GS,BofA, Citibank and Wells Fargo (from memory), are all among the top 10 shareholders of nearly every fortune 500 company. If this is the case, I don’t think these money lovers would be taken advantage of.
There would be method in their madness.
Reading you I have actually begun to change my views on a number of issues. I think it was the outsider/insider thing that broke loose some of my old ways of thinking. I listen to the news a bit differently now, thanks
former treasury secretary Frank Newman appeared on fox business today touting his new book saying that the U.S. should sell as many treasuries as possible and that the national debt does not have to be paid off,and has never been paid off in the 200 year history of the U.S.,also The U.S. should immulate china and use the treasury funds to build infrastructure. Now I ask, do you think this is how the sovereign debt crisis started? was it not popular some years ago for the U.S. to follow japan. Haven’t we seen this movie already and know the ending? what kind of minds think up this stuff.
concerning managers, wasn’t mitt romney the ultimate manager, in a very exclusive club known as the corporate raiders, and now looking to raid the presidentcy.
It isn’t just the managers. Compare what Pete Rose was paid at his zentith to what a mediocre infielder is paid now, and you get an idea of how much misallocation there is in the economy. Forget real estate, watch baseball. About the time players contracts are in default and they are being paid in blocks of season tickets, only then will the bottom be in.
for your continued insights.
It’s a wonder you don’t just give up and go hide out on the ranch.
In a country of zombies and STUPEFIED citizens, you’re one of the sole voices of reason.
And a patriot, a true patriot.
US has almost reached the final chapter of falling republic. Greek Philospher Plutarch said the best.
“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”
Treasurys Rally After Record Auction
Treasury prices rose after a landmark was set for U.S. Treasury bond supply: A sale of $21 billion, 10-year notes were sold at a yield below 2% for the first time on record.
Man ole Man Bill. You hit it on the head this time. Working for a very large telephone company I work in empty buildings that used to team with activity and watch management crack the whip while looting the treasury. A testament to Zombification.
It seems as if all capitalistic republics inevitably go through a cycle of birth (health and prosperity for most citizens), decline (gradual decline in growth, health and prosperity due to increasing corruption), and then death (corruption, chaos and revolution). However with communist countries they tend to skip the “in between part” and go straight to corruption, greed and revolution/decline (eg. Russia) or they become capitalist (eg. China).
So the trick seems to be to extend this middle period and long as possible and prolong the inevitable for as long as possible and therefore capitalism is still better than communism.
Great article Bill – from Chris in South Africa.
The good news, as Bill has mentioned, is the sooner the end comes, the sooner a new beginning can start, after all isn’t that how America started in the first place ? (revolution against Britain)
I agree with your statement about a Economic system perverted by those who take advantage of it , and heres why …..
Why NEWT and Rick Perry are right to Question the Metrics of How Romney and Hedge funds Like Bain capital have made the USA and Europe Unsecure in durable wealth creation .
Why Capitalism has Not worked over the past 17 years and the Position the USA and Europe are now in…… because we did not stay true to the Principles of Making sure Self Reliance above everything else was sustained as this was what the Founders meant when they wrote the words Independence and Individual Liberty into the US Constitution . Today we are SERFS Dependent on Foreign Import supplies and thats about to Cause a destabilization of the Independence of the USA in ways that will end in a nationalization of the FREE market system and I have to say I think it was Planned by some in the policy making positions because they are the best and brightest so stupidity is no excuse .
The Paper Currency markets are about to collapse because of Hedge Fund Operators taking advantage of a Failure of a WTO FREE TRADE AGREE of the past 17 years !!!!!
CAPITALISM AND THE VALUE OF IT IS SUSTAINED IN A COUNTRY WHEN IT IS PRODUCING A VITAL HUMAN NEED NOT THE PAPER CURRENCY VALUE OF ANOTHER COUNTRIES PRODUCTIONS . THIS IS THE RESULTS OF NOT HAVING TARIFF TRADE IN THE MIDDLE OF A INTERNATIONAL TRADE AGREEMENT WHEN THOSE TRADE PARTNERS CURRENCIES ARE VALUED DIFFERENTLY AND NEVER PAR VALUE BECAUSE OF THE CRIME OF NOT FOLLOWING A FREE FLOATING CURRENCY RULE AND IF YOU DON’T UNDERSTAND THIS THEN READ ” GRESHAM’S LAW OF THE 14TH CENTURY , and when reading about the way it works consider the 2 side of the argument in that the condition works both ways in terms of what happens when 2 different valued currencies trade in the same market without a Counter balance which a Country like USA or Europe needs a tariff Duty on Imports that are Under valued in order to stop the Devaluation of that Countries currency and with it their Durable wealth Creation at the domestic level of the economic structure . If you ask a Hedge Fund Like Bain Capital would they have had the same Incentives that over the last 17 years of tariff Free trade with Asia would they have been able to calculate the profits of Having something Produced in a Asian manufacturing area rather than in a USA or Europe area if Import tariffs were in Place at the port of entry and if this is all thats Necessary in Maintaining a solvent economy is to Have NO Tariff Trade then why are the Highest valued Currency Nations before the WTO free trade agreement was started 17 years ago now without the credit availability which was propping up these economies in the European Union and the USA have been doing up to 2008 , why now are these 2 economies failing if Tariff FREE trade was the answer to our Trade Policy and economic affairs !!!!!
The Paper Currency markets are about to collapse NOW because of this Lack of Holding those accountable for NOT following the rules of FREE Floating Currency rules that have to follow a Tariff Free trade policy , because NOW we out sourced all our Tangible Production and those Fools who did this have placed the west in a destabilized position . Intrinsic Value behind a Currency is the Vital Human Supply it creates to sustain Life , Liberty and the Pursuit of happiness , words that Fools No Nothing About but are running the Paper markets that Feed societies , and while they chased those Paper profits the Smart ones in the middle of all this have taken control of the Production side of this Cabal and now we are about to see what its like to RUN OUT OF SUPPLY !!!!!
I think the defection from the dollar by the Nations below that are the main suppliers of tangible vital human needs are now going to start using that vital resource against the Dollar traders as the paper trade starts to come apart at the top …..
First we have this story , then the one below shows the results of the defection from the paper currency markets …. nasty .
More of the results you talk about when the system becomes Perverted by a Internationalism of Pervert trade Policies that do nothing to manage international solvency in Currency Markets under the old rules of Gresham’s Law of the 14th Century ….
Full-Blown Civil War Erupts On Wall Street – Financial Elite Start Turning On Each Other
Reality Finally Hits the Financial Elite as They Start Turning On Each Other
All Romney and hedge fund… operators like him lobbied over the years to not Enforce the free Floating currency rules of that Agreement so they could sit in the Middle of those imported products tariff FREE and rake in a 10-1 currency swap , and virtually destroyed every domestic operator and with it ALL the CONSUMER CASH what IDIOTS !!!! Now If you are the ANTI-Growth ANTI capitalists that are in Power today then this Trade Policy worked fine as they used the Greed of the Hedge Funds chasing ONLY Paper profits around the world without regarding sustaining a self reliance in a given society , LIKE the USA MITT now we can’t even make a NUT or a BOLT to Hold our LIVES together for crying out loud man how Vulnerable are we to what Congressman Roscoe Bartlett says here ???? Congressman Roscoe Bartlett says GET OUT of the CITIES , I say why did we let it come to this MITT , why did we just simply focus on the Paper Profits and relocate all our Durable Production Off Shore , and put that control in the hands of Other nations that would use that leverage against US MITT ???
Its all right here explained warned was happening but Know one gave a dang , they only cared about the paper , while some were using this mistake to further an agenda that Technocrats and Globalists were promoting , http://www.cnsnews.com/node/75388 , and Now we have Nothing to back up the paper that makes LIFE sustainable . And those who have the supply of stuff that sustains Life are getting ready to use that against we the people of the USA and the EU as we spiral down with our deficits ,
Oh and we were warned BUT those pesky Lobbyists they told Regulators LOOK the other way and we will make sure you get a Benefit package some where some way …. more of the Perverted ways of corrupting the system , yes capitalism is under siege .
The High Cost of the China-WTO Deal: Administration’s own analysis suggests spiraling deficits, job losses; By Robert E. Scott; February 1, 2000:
Remember what Ross Perot said , we would Hear a Giant Sucking Sound with this Trade Policy , he was right in the overall sense of International economics without Trade negotiations that were kept in line with Balanced trade between nations with different valued currencies , again Gresham’s Law . http://www.thenation.com/article/new-giant-sucking-sound
We need to retool our industrial base to at least be able to supply our most needed supplies and then we can negotiate and sustain some what of a quality and abundance in our supply of vital human needs . We should have seen Mitt and his Bain capital , the International banking franchise people as well as all Multi-National Corporations realize this need to keep America a Vital force in world trade negotiations making sure we negotiated Fair trade and balanced Trade so we were adequately supplied and deficits free , but instead Mitt and his Greedy group and all the Multi-nations hedge fund operators like Mitts focused Only on the Dollars and not on what that currency was representing , and today all we have left is the paper with nothing of Tangible intrinsic value to back it up , and this is what we get read these links by our so called TRADE PARTNERS , Putin says U.S. is “parasite” on global economy
If The Eurozone breaks apart and they are so dang dependent on BRIC nations supply , they may be in a Position to Break away from the US Dollar are world trade currency to maintain their supply of tangible goods a Vital human needs over a paper US Dollar , this is the kind of critical position we our talking about here .
Ahmadinejad of Iran Is President of OPEC?
Yuan Will Be Fully Convertible by 2015, Chinese Officials Tell EU Chamber
Yuan Will Be Fully Convertible by 2015, Chinese Officials Tell EU Chamber
Mitt Romney how can you Repair the USA and European Economies when you are only a Paper dollar currency in a bank now that all the Durable Resource supply and the manufacturing of it is located in foreign lands called the BRIC nations and they are about to tell you and the rest of us they don’t want our dollars any more ??? Looks like we should have kept some Manufacturing here in the USA and Europe should have done this too , so at least we could have some Leverage in Negotiating Trade even if that Trade agreement ended up in disagreement because the way it now we the people are pretty vulnerable to having to BEG for MERCY because what else do we have to fall back on when the BRIC rejects the Dollar and cuts the USA and Europe Off for a Little while ?
Lets talk about the Stall in equities markets over the past 12-14 years and there relationship to Food production keeping up with population growth , and how this is causing the defection of private capital investors at the top tiers of the financial sectors to be absent from the financing of equities markets and growth markets , they don’t see the structure in place that can sustain growth in the food commodities sectors so they lose their will to stay engaged in long term investment positions , and heres why look at these 2 charts see the last 12014 years of price indexes going up and then going down up and down but from 1998 to today they are basically Flat Growth , so this shows us the Long term investors who finance growth markets have lost their will to stay Engaged with their long term debt guarantees , and now today the Government has stepped into this Mess of debt because the private investors have signaled they are not going to hold the Bonds they see as unsustainable because Population is out pacing supply and there is no place left on Earth to expand the standard methods of supply to meet this demand . The world markets are telling us this by there unsustainable growth patterns over the last 12-14 years , compare these charts, http://stockcharts.com/freecharts/historical/djia1900.html , http://en.wikipedia.org/wiki/File:Wheat_yields_in_developing_countries_1951-2004.png , the stagnant growth in equity and supply in grain is obvious , and you cannot have sustainable growth in any durable goods unless the bread basket is growing with it . See ” UP TO ” 1998 all cylinders of growth were advancing together as the futures traders could see world food supplies advancing at unlimited growth projections because plant breeding was producing increased yielding grains .
There is no way to fix the problem. The people responsible for the destruction of capitalism will not go away. So the only solution is collapse. A depression is not the problem. A depression is a solution to the problem. Once the gangsters that have ruined capitalism are driven out, maybe we can get back to a functioning free market system. But it will take a long time.
As long as we have a central bank, I’ll consider us closer to fascism than capitalism.
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Let’s see, Capitalism is an economic system that is founded on exploitation, cynicism, nihilism and greed. And you wonder how such system became corrupted?
Given a choice, Bernanke will likely strangle the currency (your money)... in favor of “strengthening” the economy.
Eventually, economic reality and markets will collide -- unfortunately, the higher the market, the harder the fall.
How certain business practices wind up jacking up costs before sticking you with the bill.
The Japanese Nikkei fell flat on its face overnight.
While Bernanke Runs Wild, Let’s Talk Ponies