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Launching the biggest nationalisation programme in history
"Bankruptcy of Neo-Capitalism," shouted a headline in Wednesday's French press. Scarcely since Hitler blew his brains out has the type in Paris been bigger or the contentment broader. Almost everyone everywhere is enjoying the show. Each headline brings more laughs. The financial markets give people neither what they expect nor what they want, but what they deserve. What a treat to see them getting it.
On Wall Street and in the City, the masters of the universe – who had the pay slips to prove it! – are now getting blown up by their own debt bombs. The top five firms on Wall Street were thought to be "too big to fail". But Bear Stearns has been blown to smithereens. Lehman is exploding into small pieces. Merrill ducked and missed the blast. Then, the last big capitalist desperadoes – JPMorgan and Goldman – waved the white flag. They petitioned the government to allow them to become regulated, deposit-taking banks!
Who isn't amused by the delicious irony? George Bush claimed to be a conservative. Yet he will leave behind the biggest nationalisation programme in history. The takeover of Fannie and Freddie alone leaves half the country living in what is effectively government-subsidised housing.
Meanwhile, the coordinated takeover of Wall Street, put together by his aparatchiks, left even the hardened lefties at France's Libération in shock and awe: "This enormous statist intervention, though presented as an example of American pragmatism, is the work of the most ideological and extremist administration that the US has ever had."
How heartwarming to see that the meddlers and world-improvers get a second wind. It's like driving around in a '33 Lincoln... or throwing rocks at the gendarmes in 1968. The nostalgic old, grey Bolshies feel young again! Impetuous! Brainless! And even the capitalists are behind the bail-out programme. All over the world, markets are out and state-sponsored meddling is in. Free market principles are fine – until prices start going down.
And what an amusing bunch of numbskulls – Greenspan, Paulson and Bernanke. Every word they've said so far has been financial poison. "Greenspan relaxed about house prices..." reported the Financial Times in 2005. "Most negatives in housing are probably behind us..." said the same sage in October 2006. "We believe the effect of the troubles in the subprime sector... will be likely limited," said Bernanke in March 2007. It's "not a serious problem... I think it's going to be largely contained," added Paulson in April 2007. But these are the same numbskulls who now say they are saving capitalism from itself. What can we expect?
Since 1971, the world's money system rests on the dollar. And the dollar rests on nothing but faith, hope and the kindness of strangers. While the full faith and credit of the United States of America is elastic, it can snap. Last week, the price of gold popped up $120 in two days. Then, on Monday, it added another $43. Oil gushed up 44% in the space of barely a week. Investors felt the geyser of liquidity coming from Washington and beat a retreat from the dollar. For the last 15 years, the American money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. As a result, the USA now has more financial obligations than assets. It is broke.
Nevertheless, the debit side of its ledgers grows heavier and heavier. This year's US government deficit will be about half a trillion. Its annual trade deficit is about $700bn. The US bailout plan will probably cost at least $1trn more.
Where will it get that kind of money? There are only two possibilities – one honest and depressing, the other corrupt and alarming. Whether it borrows the money, or prints it up, the world enjoys no net increase in financial resources. Borrowing takes resources from projects that might have been worthwhile and diverts them to the losers. Interest rates rise as a consequence of the extra borrowing; higher rates generally worsen the economic picture. And while America borrows, long term, at almost 5%, it lends at barely 2%. It can't make up the difference in volume; it can only go broker faster than it already is.
If, on the other hand, it merely prints the money – or if it creates it "out of thin air", to use Lord Keynes' handy phrase – the results are even more spectacularly bad. Inflating the money supply with new currency, à la Argentina or Zimbabwe, wipes out debts. But it destroys faith in the dollar and brings down the whole world's money system.
Sooner or later, this is just what will happen. Not because capitalism doesn't work – but because it does. Capitalism is doing just what it should do – it is separating fools from their money. But the fools vote. After a big bubble, there are more fools than sages and, in the United States of America, more debtors than creditors. Sooner or later, Americans will realise they are better off destroying their own money than preserving it;. that they are better off with inflation than with depression; and that they'd rather stiff their creditors than pay their bills.
They will do the maths – and then they will do the deed.
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Bill Bonner
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