Twilight of the capitalists as 'innocent fraud' gives way to armed robbery
By
Bill Bonner Oct 24, 2008
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"Bush is to the left of me now," said Hugo Chavez. In a great bubble, people lose their money once. But they lose their heads twice; once on the way up... again on the way down.
"Just as there are no atheists in a foxhole, there are no economic fundamentalists in a crisis like this," says Jared Bernstein, an economic adviser to Barack Obama. In today's financial holes you find nothing but True Believers. What they believe is the tale now being told. Where these beliefs lead is a guess we make at the end. Only a few months ago, 'free enterprise' was still in style. 'Capitalism' was still respectable, 'investment banking' was still a paying job. And the god of state interventionism was a schmuck.
But capitalism is a fair-weather creed. When the skies are clear, people bow down to it. But when the winds blow hard, the capitalists' faith is swept away with their profits. In the Great Boom, 1984-2007, few doubted that capitalism would make us all rich. But now, with the skies darkening, a new faith is spreading – one that is equally and oppositely absurd. Now, the investor, the businessman, the economist and the consumer all believe they need a bureaucrat to protect them... from capitalism. And so an old god comes back... even dumber and meaner than when he was run off 30 years ago. What Galbraith called the "innocent fraud" of the capitalists – who deceive themselves along with everyone else – is replaced by the armed robbery of the politicians.
"We are all Keynesians now," said Richard Nixon. Times were tough in the 1970s. Whether cause or consequence, we don't know... but government was as popular as burnt orange. John Maynard Keynes had given the meddlers a handy theory: government should run surpluses in the fat years and deficits in the lean ones, thereby counterbalancing the business cycle. In a downturn, people tend to save rather than spend. This causes a general coagulation in the financial system. Before you know it, the extremities are turning black and blue and soon need to be amputated. Just read the papers; terrified businesses are now sawing off their own legs.
Keynes' idea was to give the economy a transfusion, pumping extra liquidity into the arteries of commerce, thus making up for the normal bloodflow of private transactions. But how does the hack working for the Treasury Department know how much glucose to inject, and when? How do the central bankers know what price should be set on credit? How is it possible for Mr Market to be all-knowing one moment and a complete moron the next?
"Economics is not an exact science," says Alan Greenspan, flattering his profession. Actually, family counsellors get better results. Palm readers have better track records. Quack doctors are less of a threat. Keynes' theory was simple, elegant – and catastrophic. Government proved very good at running deficits, but had trouble with the surpluses. The last real US government surplus came in 1969. Even the supposed surpluses of the Clinton years were accounting frauds. The national debt increased every year, through Republican and Democratic administrations. And now, the deficit could reach $2 trillion in 2009.
"If we were to tighten our belts now, then we would repeat the mistakes of the Great Depression from which Keynes produced his general theory," Bernstein explained. And yet, as investors lose faith in capitalism's credits, faith in government has rarely been greater. The more the US government borrows to fix capitalism, the more investors seem to want to lend. "It is remarkable how much capital the US has been able to attract to finance its borrowing needs," says Brian Sack, Washington-based senior economist at Macroeconomic Advisers. That might change, he says, "but there are no clear signs yet". But each dollar borrowed weakens the borrower's balance sheet. It is the law of diminishing returns applied to debt: the more you borrow, the less likely it is that the money will be returned. Currently, the dollar is rising along; America seems able to borrow all it wants at low rates of interest. This may be a great convenience to the US and its gods-du-jour. But it is bound to be a sweat for lenders.
Warren Buffett, arguably the greatest investor of all time, told the world his money and his mouth were in agreement: "Both say equities," he wrote in The New York Times. Trade your cash for shares, was his advice; he is sure shares will do better than cash in the next decade. But while he predicts shares will beat cash over the next ten years, comrades Bush, Bernanke, Paulson and others practically guarantee it. Not that they can make the world's shares more valuable; but they can certainly make cash worth less.
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