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Today we continue with the last installment of our trilogy. We render unto the Caesars of the City, the Commoduses of the Central Banks, and Neros in Washington and Whitehall what is properly theirs – that is, not earnest criticism, just idle mockery. A good flimflam needs a good mountebank and a good mark.
Two weeks ago, we pointed out that the City was full of bright cads and dull sharks. Then, last week, we showed that the central banks are run by conceited humbuggers. Today, it is the politicians we come not to bury, but to praise. They did their work well; they set up the marks.
The two great political figures of the last 30 years were Mrs. Thatcher and Mr. Reagan. These titans from the two sides of the Atlantic led the way to a new idea of how the world should work. Thenceforth, capitalism was king. But it was a new kind of capitalism, with a strange, unnatural face. It was not the old free enterprise, running wild in the jungle, red in tooth and claw. This new capitalism was more like a pet shop, where all the animals were cute and cuddly, and didn’t eat the customers.
Mrs. Thatcher and Mr. Reagan and their followers had seen how centrally planned economies worked; they wanted nothing to do with them. The free market seemed like the best alternative. But the trouble was, they had no real respect for it. Instead of quaking before it in genuine fear and awe, like Moses before the burning bush, they began to believe that they could be its master. Then, they developed a whole host of fantasies about what this tamed beast could do for them.
Not only could the free market solve the problem of poverty, it could solve almost every other problem too. It was a social panacea. Just look at wealthy countries, they said. Switzerland is clean and prosperous. By contrast, communist China is a dump. People are healthier and happier in free market countries, where they have better automobiles and lower birthrates. Science, supported by the free market, would find cures to diseases and even help people live longer.
The logic was simple enough: free enterprise made people rich. And with their money, they could do wonders – cleaning up the factories, building hospitals and clinics, organising public day care and pilates classes – even getting rid of smoking!
Nothing was too absurd or contradictory for the True Believers. Gradually, they began to confuse the fruit with the tree – and then mistake the tree for a lamp post. Financial incentives were thought to be the key to everything. If an executive failed to maximise shareholder value, it was because his bonus was not large enough. If students showed poor test results, it was because teachers were paid by the job, not by the outcome. And if terrorists attacked a building in New York, it was because they lacked financial opportunities in Cairo.
The ideas were slippery, but they greased the skids. Soon, the marks were ready to go along with anything. Shareholders consented to hundreds of millions in bonuses and stock options for key executives. Taxpayers allowed huge tax cuts – widely believed to be aiding the wealthy – because they looked forward to the day when they would be wealthy too. And almost everyone, everywhere willingly switched off his common sense, in the belief that this new, kindlier, gentler capitalism would add wealth faster than they could spend it. And if they over-spent, hyper-capitalism would soon catch up.
In public finance, this led to Dick Cheney’s famous quip: “Deficits don’t matter.” This in turn led to the greatest explosion of government red ink the planet had ever seen. During the first seven years of the George W. Bush administration, about $20trn was added to the US ‘financing gap’ – more than under all the previous US administrations put together.
What was good for the top was good for the bottom. Private households, too, ran deficits of their own. Savings rates fell close to zero while US household debt rose from less than $2trn in the first year of the Reagan administration to nearly $13trn in the sixth year of the present administration.
In Britain the story is about the same. Before the Thatcher revolution, household debt was about 65% of household income. By 1988, it had reached 100%. And by 2007, it was more than 150%. When a consumer spends a pound he earned, it is income to the businesses that receive it. But it is a cost too – a wage expense. But if he spends a borrowed pound, it comes to business like manna from heaven, with no offsetting wage cost. Higher profits, greater leverage, more debt – it was all catnip to the City.
Financial assets were only 4.5 times GDP in 1980. Now they are ten times as large. But that is nothing compared to the sugary confections of the credit industry. Credit default swaps alone are said to be worth $45trn. The earnings of the financial sector equalled only 10% of total corporate earnings in 1980. By 2007, they made up 40% of the total, even though they still only employed 5% of the workforce.
But “that game is now up”, says The Economist. Alas, this new capitalism wasn’t new. It was the same old system. The free market doesn’t make people rich at all. It only allows them to get rich – if they do the right thing, or get lucky. If they do the wrong things, it will punish them, ruin them – and laugh at them.
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by
Bill Bonner
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