The End of Democracy

Modern democracy, like modern capitalism, is a self-limiting ailment…and this fact is becoming clearer to the United States with each passing day. Bill Bonner explains…

This week marked a milestone in the Western history. On the 5th of May 1789, the Estates General convened in Versailles.

In the popular mind, if there is one, mankind has been on a steady upward slant. From single-celled amoeba to Homo ergaster to Barack Obama…from the chubby carved madonnas found in caves to Caravaggio’s Madonna found in Sant’Agostino to Madonna herself, whereabouts unknown…from crossing the Red Sea out of bondage in Egypt to crossing the Rubicon to crossing the Delaware, it has been a march from the dark depths of history into the sunlight of modern democratic capitalism and consumer credit.

‘It’s all good,’ as they say in America.

Yes, of course, there are occasional instances of backsliding…even a Roosevelt or a Robespierre could be born with a prehensile tail. But the progress of the race continued. Tribal chiefs in skins gave way to emperors with purple on their backs. Wars, revolutions…one regime was replaced by a better one; tyranny butted heads with freedom until, finally, in the Year of Our Lord, 1989, the Soviet Union collapsed…leaving only one system resplendent, triumphant… modern capitalist democracy.

American intellectual Francis Fukayama, drinking too deeply from the victory cup, announced that history itself had come to an end. There would be no further need for wars or revolutions. Like Engels before him, he thought perfection had been achieved. In his mind, not only was he living in the best of all possible worlds, but it was a world that got better all the time. That was the real beauty of modern democratic capitalism; it adapted to change; it improved. "You can fool all of the people some of the time, and some of the people all of the time," said Lincoln, putting his finger on it, "but you can’t fool all of the people all of the time." Sooner or later, the residual wisdom of the masses will catch on to flimflam, in other words, and vote the rascals out. (Likewise, the process of what Schumpeter called "creative destruction," assures that capitalism always sweeps away its old mistakes so as to make room for new ones.)

But the difference between democracy in theory and democracy in practice is like the difference between a filet mignon at the Ivy and a visit to a slaughterhouse. Watching the current U.S. presidential election, for example, calls for white rubber boots…and a good hosing afterward.

Both Hillary and McCain called for a "summer holiday" for the gas tax. Already, fuel costs only about a third of what it costs in Britain. And the effect of cutting taxes on gasoline would be so obviously negative, encouraging drivers to use more gas, even New York Times columnist Tom Friedman can see it is pandering to the voters: "This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks."

Of course, pandering and lying are what make modern elections more entertaining than an abattoir. But they’re also why capitalist democracies tend to cut their own throats. The politicians may be pandering, but the yahoo voters – as well as the powerful special interests – rarely turn down a chance to pick someone else’s pocket. And once granted, they never give it up. Then, the system doesn’t adapt to change; it tries to prevent it. No one wants a correction. Instead, the banker wants to borrow at lower rates. The homeowner wants to live in a house he can’t afford. The retiree, who forgot to save while he was working, wants someone else’s money to pay for his golden years. And each bailout, privilege, and giveaway brings the knife closer to the jugular.

Who can stop it? For every Paul Volcker and Tiberius Gracchi there are a hundred Alan Greenspans and Hillary Clintons. And the poor voter not only can’t tell them apart – he doesn’t want to. He’s chumped by his own vanity. On Election Day, the ultimate decider-in-chief looks in the mirror and sees a face as wise as Solomon and as good as Billy Budd. But when ballot box gives him a license to steal…he can’t help himself. That’s why every politician, from Caligula to Mussolini to George W. Bush, has found that the best policy is not to confront the mob, but to suborn it, with flattery, inflation and war.

One of the many low points in America’s campaign was reached when all three candidates appealed to fans at a Worldwide Wrestling extravaganza. All three candidates must have felt at home. Professional wrestling is a lot like a national election – staged, comic and appalling. There is probably no group of bigger cornballs outside a state legislature. But each candidate pretended to be just one of the rubes. Obama pronounced some forgettable words of feigned solidarity. Hillary said she was ‘ready to rumble,’ on their behalf. But John McCain (and his McCain-iacs) won the champion’s belt that night. Wrasslin’, he said, "is about celebrating our freedom."

So spellbinding is the bright promise of democracy that generations of Frenchmen leapt to suicide to protect it. America’s current president has practically bankrupted the nation to try to implant it in Mesopotamia. And Republican candidate John McCain has made it the centerpiece of one of the most boneheaded proposals ever to come out of a presidential campaign. "A league of democracies," says McCain, will provide a bulwark against tyranny and terrorism.

The 16th Louis called the Estates General for the same basic reason McCain wants a league of democracies – to try to adapt to new conditions while preventing things from really getting away from him. But the assembly soon spun out of control. The Old Order in France was no more willing to give up its ill-gotten gains than American voters are today. The system couldn’t adapt. In the end, Louis mounted the guillotine; sooner or later, so will modern democracy.

Until next week,

Bill Bonner
The Daily Reckoning

May 09, 2008 — London, England

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

The markets didn’t reveal anything very telling yesterday. The Dow rose 52 points. The dollar held steady. Oil remained near its all time record of $123. And gold went up $10.

So far, things have worked out more or less as we expected. The "war" between inflation and deflation has produced plenty of noise and casualties…but no decisive victory.

We guessed that the Fed would be far more interested in fighting a deflationary recession than in fighting an inflationary boom. America’s central bankers see their mission in three parts – to protect the value of the dollar…to protect the banks…and finally to make sure that all politicians are re-elected and all Fed governors are reappointed. This last part of their mission leads them to ignore the first part. In order to help the career prospects of politicians and their Fed appointees, the latter must try to keep the economy moving forward – even to its own destruction. In the present context, that means holding off badly needed corrections. Consumers, government and business are all deep in debt. But none of them are going to cut back on spending unless they have to. A correction would force the issue; so, it is to be avoided at all costs. And the most direct and immediate cost is what is supposed to be the Fed’s number one priority…the U.S. dollar.

We guessed that inflation would push up commodity, oil, gold and consumer prices…more than it would help the real economy and stock prices. That seems to have happened too. Commodities, oil and gold have all soared. The economy, meanwhile, is growing more slowly than the population. And stocks rallied and retreated – and ended up about where they were 10 years ago.

But what about the kind of inflation people worry about? What about consumer price inflation? How come consumer prices have not gone up more?

Give it time…dear reader…give it time.

This week, both the Bank of England (BOE) and the European Central Bank (ECB) decided that it was more important to fight inflation than it was to try to boost economic activity. Both left their key lending rates where they have been – at 5% for England, 4% for Europe – or two to two-and-a-half times the Fed’s rate. Naturally, each of the 7 rate cuts in the United States made the U.S. dollar less attractive; who wants to hold a deposit in dollars paying 2% when he can shift his money to euros and earn twice as much?

Speculators saw the trend coming and sold the dollar down below $1.60 per euro – and sent gold over $1,000. Then, they saw what looked like the end of the line for this trend too. The Fed only has 200 basis points left. And it has warned that there may not be any more cuts coming soon. The dollar strengthened. Currently, it is at $1.53 per euro (EUR). Gold also retreated…and yesterday stood at $882

Meanwhile, Claude Trichet, head of the ECB warns that we may be in for a "rather protracted period of high inflation." The BOE also says it has to try to keep a lid on inflation. The Daily Mail came out with one of its shocker stories two days ago, saying inflation had so raised the cost of necessities in Britain that the average household now has less discretionary spending money than it had 17 years ago. In effect, the typical family is poorer than it was in 1991.

We have not seen comparable numbers for the United States, but we suspect they will show the same thing: that by the time a family has finished paying for food, fuel and medical care it has less money left over than it had before Bill Clinton’s first term. Why? Because inflation is doing its work – it is reducing Americans’ real wealth.

But so far, it has come in like a black cat at midnight…on paws so silent hardly anyone has noticed. The U.S. government even claims it is not there at all. "Core" inflation is still under control, say the feds.

What was amazing about the last 20 years was that the dollar-based monetary system worked as well as it did. You would have thought – and we did think – that once the link with gold was severed in 1971, there would be no stopping inflation. Instead, inflation went down…to levels that hadn’t been seen since Eisenhower. Why? Because there were so many things holding consumer prices down – 2 billion new workers in the labor pool, Wal-Mart’s Everyday Low Prices, just-in-time inventory systems, computers, globalization, deregulation, and the rise of modern capitalism worldwide. But now, the benefits from those trends seem to have reached their limits.

Labor rates are going up rapidly in China and India. Commodities are soaring…governments are re-regulating…modern capitalism has been weakened by its own excesses…and inventories are at 40-year lows.

Inflation – like everything else in the financial markets – has been globalized. And soon, inflation will come in – not as a little kitty, but as a mean panther…

*** When the Roman Empire was still young and vigorous, work crews and engineers followed the legions. Wherever the armies conquered, roads, bridges and water systems were built. Some of them were so well constructed that they are still in standing.

But then, we are a ‘deathward going tribe’ – as Aristotle put it – no matter what flag we fly. Pretty soon, the Romans reached their limit…then, roads fell into disrepair…and armies could no longer maneuver quite as well as they used to. As the infrastructure goes, so goes the empire. Finally, the empire fell…and vines grew over the Capitoline Hill.

How’s the infrastructure in the United States? A reporter from the Financial Times gives us an update:

"On the pot-holed highway to hell," to he calls it.

"If anyone doubts the problems of US infrastructure, I suggest he or she take a flight to John F. Kennedy airport (braving the landing delay), ride a taxi on the pot-holed and congested Brooklyn-Queens Expressway and try to make a mobile phone call en route.

"That should settle it, particularly for those who have experienced smooth flights, train rides and road travel, and speedy communications networks in, say, Beijing, Paris or Abu Dhabi recently. The gulf in public and private infrastructure is, to put it mildly, alarming for US competitiveness.

"You might have expected that investing in US infrastructure would be a hot political topic this year. Well, no. Hillary Clinton spent the final week of her Indiana campaign standing on the back of a pick-up truck arguing for a temporary suspension of the "gas tax", the fuel duty that pays for highways.

"You read correctly. Faced with the emptying of the Highway Trust Fund, established in 1956 as the US entered a period of growth and prosperity, Mrs Clinton suggested cutting its source of funds (which she claimed could be made up by a tax on oil companies). It was more important to give Americans a summer break from $4-per-gallon petrol.

"The US invested 10 per cent of its federal non-military budget in infrastructure in the 1950s and 1960s as it built the interstate highway system – at the time, the envy of the world. While US investment has fallen to less than 1 per cent of gross domestic product, China has been matching its double-digit postwar record."

The Daily Reckoning