How Faux Capitalism Works In America
Stars in the Night Sky
The U.S. stock market’s recent zigs and zags have provoked much squawking and screeching. Wall Street pros, private money managers, and Millennial index fund enthusiasts all find themselves on the wrong side of the market’s swift movements. Even the best and brightest can’t escape President Trump’s tweet precipitated short squeezes.
The Donald mercilessly hits the shorts with a well-timed tweet. But as it turns out, this market is in a really bad mood at the moment. [PT]
The short-term significance of the DJIA’s 8 percent decline since early-October is uncertain. For all we know, stocks could run up through the end of the year. Stranger things have happened.
What is also uncertain is the nature of this purge: Is this another soft decline like that of mid-2015 to early-2016, when the DJIA fell 12 percent before quickly resuming its uptrend? Or is this the start of a brutal bear market – the kind that wipes out portfolios and blows up investment funds?
The stars in the night sky tell us this is the latter. For example, when peering out into the night sky even the most untrained eye can identify the three ominous stars that are lining up with mechanical precision.
These stars include a stock market top, followed by a monster corporate debt buildup, and a fading economy. In short, the stock market’s latest break is presaging a corporate credit crisis and global recession.
BofA/Merrill Lynch US high yield Master II Index yield – this looks like a quite convincing breakout, impossible to tweet down. In other words, the corporate debt build-up is beginning to bite back – and rather bigly, if we may say so (ed note, in case you’re wondering: the little poems are from a Spectator competition in which people used phrases from actual tweets to put together Donald haikus and poems). [PT]
The last time these three stars aligned in this sequence was roughly a decade ago. If you recall, that was when the DJIA crashed 50 percent coincident with a mega credit crisis and recession. We suspect that the disaster that’s approaching will be much larger, and much more destructive than the disaster of a decade ago.
Astute readers will be quick to point out that government debt was not identified as one of the three ominous stars lining up in the night sky. This is not an oversight. Rather, it is an insight.
Without question, government debt has burgeoned way beyond what even the most doom and gloom pessimists could have envisioned just a decade ago. In fact, November marked the widest one month budget deficit in U.S. history.
Over a one month period – a month with just 30 days, not 31 – the U.S. government spent $411 billion while it only received $206 billion. By our rough back of the napkin calculation, the U.S. government spent nearly double what it took in. That difference, of course, was made up with debt. Roughly, $6.83 billion of new debt was added each and every day.
At best, spending more than one makes, like smoking or swearing, is a bad habit. However, spending more than one makes with no intention to pay it back is a moral failing. What’s more, running up untenable levels of government debt with the implied intent of inflating it away at the expense of the citizenry is downright evil.
It’s definitely a tremendous pile of debt… and the slope of the mountain has steepened quite dramatically in recent years… [PT]
Day after day, month after month, year after year, decade after decade, the U.S. government has racked up close to $22 trillion in debt. Throw in unfunded liabilities of social security, Medicare (Parts A, B, and D), federal debt held by the public, and federal employee and veteran benefits, and the U.S. government’s on the hook for over $115.8 trillion in debt – or nearly $1 million per taxpayer. How about that?
Of course, as the population ages, and the ratio of workers to retirees balances, these debt figures will go vertical. As you can see, government debt is more than just an ominous star. It’s the essential star. Moreover, it is a dying star on the verge of collapse. Quite frankly, it may not have enough energy to backstop the financial system during the next downturn. Here’s why…
How Faux Capitalism Works in America
Our guess is that the real squawking from investors won’t begin until mid-2019. That’s about the time corporate America becomes acutely aware that pumping gobs of borrowed money into grossly overvalued stocks was an act of financial suicide.
Just look to General Electric, IBM, and Citigroup for an early indication of the forthcoming catastrophe. For instance, over the last decade GE spent $46 billion buying back its shares. In 2016 and 2017 alone, at a time of mushrooming debt, GE pumped $24 billion into share buybacks.
GE wasted $46 billion on buying back its shares – with nothing to show for it except a collapsing share price. This was an astonishing misallocation of capital – very likely the company will eventually have issue new shares to prop up its equity, at prices far below the prices it paid for buying them back. [PT]
Over this time, the price of these shares dropped from about $30 to $16. And even with Thursday’s 7.3 percent boost, on word of a surprise JPMorgan upgrade, GE shares trade at $7.20. In other words, shares GE bought back during the early part of 2016 have lost 75 percent of their value. What to make of it?
The 2008 financial crisis helped clarify how faux capitalism works in America. That when the big corporations and the big banks get in trouble, the people on top quickly absolve culpability while appropriating public funds from their friends at the Treasury for the purpose of private bailouts. This, in effect, socializes the losses across bottom rungs of society and concentrates profits across the top.
No doubt, the aftermath of the great corporate stock buyback craze of 2009 to 2017 will be a text book example of faux capitalism in action. First, massive financial bailouts will be disseminated to crony banks and corporations with purpose and intent. Then, a colossal river of monetary liquidity from the Fed will be diverted into credit markets, and into direct stock purchases of government preferred corporations.
Bailout progression – it continues until it cannot continue anymore, i.e., until the “running out of other people’s money” moment arrives. [PT]
The size and scope of these fiscal and monetary bailouts will utterly dwarf the TARP, ZIRP, and QE policies of the last crisis. Assuming this doesn’t blow up the Treasury’s balance sheet, or vaporize what’s left of the dollar’s value, a certain end effect will take shape. The middle class will be reduced to a notch or two above poverty, and wealth will be further concentrated into fewer and fewer hands.
We don’t like it. We don’t agree with it. But we can’t stop it. This is the world we live in. A world where justice has been debased and rectitude has been sullied.
Socialism Always Ends in Destruction
Every attempt at socialism has failed miserably. Venezuela is only the latest country that has tried to implement a socialist paradise, only to inevitably crumble and crash before our eyes. Socialism, and its natural progression, communism, has caused the deaths of 100 million people since its inception 100 years ago.
Just a few decades ago, Venezuela had massive oil reserves and an abundance of other resources. It enjoyed wealth and an excellent standard of living. Today, Venezuelans have no food, no medicine, and the country is driven by corruption and fear. While a starving population is in despair, many are desperately trying to flee paradise. The army, supported by President Madero, is in the street, ready to brutalize any dissenters. Madero and the military are not starving.
Socialism can only survive through corruption and intimidation. It’s a system tailor-made for corruption. And corruption may be Venezuela’s largest industry.
Despite that fact that every socialist paradise on earth has turned into hell, many American politicians, and their supporters are calling for socialism for America. Senators Bernie Sanders, Elizabeth Warren, and Kamala Harris are self-declared proud socialist, loudly singing its praises. Younger newcomers such as Alexandria Ocasio-Cortez and Andrew Gillum are joining the chorus.
[Originally published August 02, 2003.]
For today’s generation, Hitler is the most hated man in history, and his regime the archetype of political evil. This view does not extend to his economic policies, however. Far from it. They are embraced by governments all around the world. The Glenview State Bank of Chicago, for example, recently praised Hitler’s economics in its monthly newsletter. In doing so, the bank discovered the hazards of praising Keynesian policies in the wrong context.
The issue of the newsletter (July 2003) is not online, but the content can be discerned via the letter of protest from the Anti-Defamation League. “Regardless of the economic arguments” the letter said, “Hitler’s economic policies cannot be divorced from his great policies of virulent anti-Semitism, racism and genocide.… Analyzing his actions through any other lens severely misses the point.”
The same could be said about all forms of central planning. It is wrong to attempt to examine the economic policies of any leviathan state apart from the political violence that characterizes all central planning, whether in Germany, the Soviet Union, or the United States. The controversy highlights the ways in which the connection between violence and central planning is still not understood, not even by the ADL. The tendency of economists to admire Hitler’s economic program is a case in point.
In the 1930s, Hitler was widely viewed as just another protectionist central planner who recognized the supposed failure of the free market and the need for nationally guided economic development. Proto-Keynesian socialist economist Joan Robinson wrote that “Hitler found a cure against unemployment before Keynes was finished explaining it.”
What were those economic policies? He suspended the gold standard, embarked on huge public-works programs like autobahns, protected industry from foreign competition, expanded credit, instituted jobs programs, bullied the private sector on prices and production decisions, vastly expanded the military, enforced capital controls, instituted family planning, penalized smoking, brought about national healthcare and unemployment insurance, imposed education standards, and eventually ran huge deficits. The Nazi interventionist program was essential to the regime’s rejection of the market economy and its embrace of socialism in one country.
Such programs remain widely praised today, even given their failures. They are features of every “capitalist” democracy. Keynes himself admired the Nazi economic program, writing in the foreword to the German edition to the General Theory: “[T]he theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under the conditions of free competition and a large measure of laissez-faire.”
Keynes’s comment, which may shock many, did not come out of the blue. Hitler’s economists rejected laissez-faire, and admired Keynes, even foreshadowing him in many ways. Similarly, the Keynesians admired Hitler (see George Garvy, “Keynes and the Economic Activists of Pre-Hitler Germany,” The Journal of Political Economy, Volume 83, Issue 2, April 1975, pp. 391–405).
Even as late as 1962, in a report written for President Kennedy, Paul Samuelson had implicit praise for Hitler: “History reminds us that even in the worst days of the great depression there was never a shortage of experts to warn against all curative public actions.… Had this counsel prevailed here, as it did in the pre-Hitler Germany, the existence of our form of government could be at stake. No modern government will make that mistake again.”
On one level, this is not surprising. Hitler instituted a New Deal for Germany, different from FDR and Mussolini only in the details. And it worked only on paper in the sense that the GDP figures from the era reflect a growth path. Unemployment stayed low because Hitler, though he intervened in labor markets, never attempted to boost wages beyond their market level. But underneath it all, grave distortions were taking place, just as they occur in any non-market economy. They may boost GDP in the short run (see how government spending boosted the US Q2 2003 growth rate from 0.7 to 2.4 percent), but they do not work in the long run.
“To write of Hitler without the context of the millions of innocents brutally murdered and the tens of millions who died fighting against him is an insult to all of their memories,” wrote the ADL in protest of the analysis published by the Glenview State Bank. Indeed it is.
But being cavalier about the moral implications of economic policies is the stock-in-trade of the profession. When economists call for boosting “aggregate demand,” they do not spell out what this really means. It means forcibly overriding the voluntary decisions of consumers and savers, violating their property rights and their freedom of association in order to realize the national government’s economic ambitions. Even if such programs worked in some technical economic sense, they should be rejected on grounds that they are incompatible with liberty.
Read More: https://mises.org/library/hitlers-economics