2009: The War on Capital(ism) Must Be Stopped 17 comments
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The Pacific Theater: The Assault on Capital
From the Merriam-Webster online dictionary:
Capital: circa 1639
1 a (1): a stock of accumulated goods especially at a specified time and in contrast to income received during a specified period; also: the value of these accumulated goods (2): accumulated goods devoted to the production of other goods (3): accumulated possessions calculated to bring in income
Capital, by definition, has a “real” quality to it. For me, the simplest way to understand capital is that it is saved work, or some token that represents or is redeemable in saved work. People who work for a paycheck and put some money in savings know exactly what I am talking about. I call this “real capital”. If I grow wheat, eat some, and sell the rest for dollars, the dollars have a real component to them and can used as capital. I can also use these dollars for consumption. Ideally, I will use some for both.
Absent domestic savings, real capital can be borrowed abroad from foreign savers. This of course is the path recently chosen by America. It is important to note that the capital we borrowed was largely used for consumption and not for production.
Capital, as defined above, defies the printing press. The government plan to “fight the recession” is based on deficit spending, funded by borrowing and by printing. If you agree with my description of capital, then consider this: borrowing capital from foreign savers does not dilute existing capital, but creating new money from nothing does. Quantitative easing, therefore, dilutes capital. The capital loaned to us by Asia will not be returned intact but in a badly diluted form. Nowhere in the MSM is this downside to QE mentioned. Articles supporting QE try to explain why printing money and loaning it to yourself is a perfectly logical and harmless business practice.
But the questions, unasked and unanswered, are obvious: If it is OK to do this, why don’t we do it all the time? If we can print our way to a sound economy, why don’t we do it all the time? If a little is OK, why not do a lot? Because it is destructive, and everyone knows it is. The notions of “recapitalizing banks” and “reigniting the economy” with newly printed money requires suspension of disbelief. Apparently, that is a specialty of Keynesians.
The European Theater: The Assault on Capitalism Itself
Again, from the Merriam-Webster online dictionary:
Capitalism: 1877
:an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market
This system relies utterly on respect for private property. That respect for private property is embodied in a judicial system to which all contract parties agree to be bound, and from which the parties can mutually expect rigorous enforcement of the terms of the contract. It is only under such protective circumstances that capital will venture forth; it is only under such circumstances that savers will loan their saved work and make productive economic activity possible. It is absolutely vital that this be clearly understood: failure of the legal system to respect private property and enforce contracts is the death of capitalism.
Not long ago, America was a favored destination for capital investment because of the protections offered by our legal system. This legal protection is being destroyed. In the past year this government jumped headlong into declaratory contract abnegation. With shocking speed our “Nation of Laws” was displaced by a “Nation of Men” who rule by decree, pick economic winners and losers, smash and nationalize businesses, and shred financial contracts, all while clearly demonstrating that they are, and know they are, above the law.
This activity is likely to accelerate as we enter 2009. I expect, for example, wholesale mortgage rewrites, under government decree and with government support. I expect the concepts of private property and financial privacy to be further brushed aside and, just as after 9/11, the legal system will bend to accommodate it. The Republicans oversaw a historic advance in the police state. It is now the Democrats’ turn to complete the takeover of the economy. The Europeanization of what’s left of the US is assured.
How long will it be before there is no more “real” capital, and what happens then? How long will it be before financial contracts are viewed with mostly skepticism, and what happens then? Is it any wonder that capital is going into hiding, trying to find a place where it can avoid debasement and theft? Will capitalism survive this dual assault? Most of us agree that America must return to a production-based economy, and that the miracle of the “financial services” economy has been revealed to be a criminal Ponzi scheme. For productive activity to take place, safeguards for capital must be reinstated. Until that occurs, capital will continue to go into hiding.
Disclosure: My capital has gone into hiding in precious metals and will remain there until the pirates of DC and Wall Street have been fitted for gibbets.
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This article has 17 comments:
Correct! But I who am from Europe have been discussing this on my US trips 10 years ago. Well I was allwayss being lectured about worldwide business etc. I was being told about cheap products which are good for the Nation. Production is down to 12 % GDP in the US. But how shall service be able to hold up for everything - there are many articles that lecture on this.
I am always amused about the most panicky approach of US towards Europe. I always get the feeling that people think that this is pure communism, and people get stuff for free or so.
The only difference is that we are not so addicted to brutal capitalism, which for us seems quite fine, and we are doing well with it. (the spread of rich and poor is growing larger as well, and surely we need to do something about this, SINCE RICH people get their money from the majority of middle and low income, 10% of US own 90% of wealth, this will not work, believe me we have had this situation in Europe several times, it never went well -> max. cap tax 50% on income)
My conclusion: Don't stick to one system, try to adapt and integrate other systems. Maybe the brutal capitalism system is also not the perfect system, look at all your industries failing.
But how does a migration towards a more European model mean an erosion of liberties? Because most of the European states have universal health care? On the contrary, their industries are able to better compete without the burden of funding health care. Their people are not impoverished when illness strikes. Free from the worry of high-priced, mediocre health care. Sounds pretty liberating to me.
These models compete in the political, military, social and even religious arenas and only secondarily in the world of ideas (where the best idea emerges simply because it approximates the real world better than the others do.)
Some scientific ideas are considered true and others false, because they describe and predict events in a the world of strictly and easily controlled scientific experiments, better than other ideas do. (Relativity theory vs Newtonian physics.) Creationists don't understand this process, of course, and believe that ALL ideas are true or false only because they are accepted or not accepted by powerful groups.
While history provides examples of various economic systems, these social-economic experiments take many years to complete, and human variables such as religion, ethnic composition and class structure, cannot be varied as they can in scientific experiments, to see what would happen if we changed them.
Karl Marx called his system scientific socialism but communism also turned out to be the political-military-rel... (atheistic) system of rules for exchanging goods and services which was ultimately defeated as much through warfare (the cold war) as through its failure as a scientific system.
We need to use reason and experiment to analyze financial and economic realities but we shouldn't indulge in illusions about their effectiveness in a world that is dominated by politics and war.
Lyndon Johnson's favorite saying was "Let us come and reason together" but reason never got in the way of his political activities, as far as I can see, or in the way of any other successful politician.
The strong don't listen to the reasoning of the weak, except for propriety's sake, but take what they want when they can get away with it.
Paradox: Even the powerful don't want to live in a world where justice is simply defined as "the advantage of the strong" and so we get philosophy, politics and economics.
But the actors of history don't listen to the philosophers, as Plato found out 2500 years ago when he tried to advise a king in Sicily and barely escaped with his life, and as Winston Churchill found out 75 years ago when he warned the world about Adolph Hitler but got war and genocide instead of peace.
What is consistent is voter revolutions that occur four years after the start of the crisis. You cannot change or probably even influence what this crop of leadership does. If Americans want a nanny state like in Europe, they will get there wish. Many of us productive will simply work less, produce less to be taxed less to pay for a nanny state. I do not believe this will happen though.
I find your article to be a very thorough presentation of your well considered views. The criticisms of stefan, Ferdinand E. Banks, and Guero have merit, but do not detract from your discourse. I also like the comment by carey_jim (with whom I have had several lively debates in other comment streams).
The risks you point out that current policies may lead to serious degardation of the value of the U.S. dollar, high or hyper inflation, and serious damage to the ability to fund our national deficitrs are recognized by many who do not share all of your economic and political philosophy. What others consider, and you do not, is how much destruction of commercial structure should be tolerated in trying to get the excesses shaken out.
You have expressed a philosophy which I would label idealistic. I prefer to analyze the nuances of situations and look for pragmatic possibilities.
Finally, I could find a reference to define the acrnym MSM. Maybe I'm just not a careful enough reader, or maybe I am too ignorant of what is common knowledge, but I would like to know what it means.
Thanks, Jason. I guess Ishould have been able to figure that out. Getting old, you know.
Back to your point of John Kerry, as a Democrat, even if he had problems with Fannie and Freddie he would not have been able to go so far against his party to make effective change. The most effective change would have been the elimination of Frannie and Freddie. The sooner the better, financially. No elected person could confront Frannie and Freddie without risking their elected position. Republicans included. Americans voted for this problem, they must own it. Which brings me to another point. Republicans in Congress should allow the Dems all they want in the coming transition. They must allow the Dems to own the solutions undiluted with Republican wisdom(which has been missing in the last 8 years, which is about how long Gingrich has been gone). Obama will not have 8 years if does not confront corporate taxes, they are too high. It is insanity to think that anyone or any thing should be taxed at rates higher than say 10%. It is only because of own highly evolved and productive economy that we have survived this long without recession. If government needs more than 10% it is doing too much.
See you in 4 years.
On Jan 04 08:42 AM Ferdinand E. Banks wrote:
> This article sounds good, until you take a few seconds and think
> about what it says. Then it isn't good but crank. Whether I am correct
> or not, I intend to continue believing that the present difficulties
> in the US could have been detected and corrected had the 2004 electrion
> turned out the way that it should have turned out - with a huge Kerry
> victory. I also don't understand why President-elect Obama should
> be satisfied with a 4 year stay in office when, if he makes the right
> moves, he can have 8.
My read of SWRichmond's line of thinking is that more important than the "destruction of commercial structure" is the destruction of a just application of law in contractual resolutions.
Destroy faith in being treated justly (ie. have your contractual rights unilaterally abrogated via gub'mint edict) and those who have capital to invest will cease investing it, thereby removing the very item which is the basis for increased productivity and an improving standard of living for society as a whole.
One of the reasons why America has remained the 'safe haven' of the world in recent times is the history of just application of contract law in business. Enormously profitable opportunities in banana republics are passed by for much less profitable opportunities in the US because capital owners do not wish the political risk of loss a banana republic's legal system implies.
If the American legal system becomes no better than that of a banana republic through gub'mint's willy nilly rewriting of contractual relationships, then capital from around the globe will seek some other jurisdiction for investment.
Even if the entire capital structure is destroyed it can be rebuilt as long as the legal system's protections are maintained. Fresh capital will be drawn to the opportunities a just system presents. However, if the legal protections are destroyed the capital structure will eventually wither and die and not likely be replaced until capital knows it will have a sound legal footing for the political risk it must assume in the investment.
Saying it's OK to break the legal rules a 'little bit' is sort of like saying your daughter is only a 'little bit' pregnant. It may not show at first, but eventually everyone will notice.
Case in point: The unannounced, overnight closure and 'liquidation' of WaMu assets was completely unprecedented. Primary creditors (aka bondholders) whose legal right to compensation was highest in the capital structure wound up getting nothing as the FDIC sold the assets and deposits to JPM for pennies on the dollar. bondholders were left with nothing to liquidate and recover their capital investment, despite the legal right to first claim on the recovery of capital in a liquidation.
If that's the way the US economic system is going to work from now on, why in the world would anybody with saved capital buy a bond in a banking institution again? Tomorrow night you could be left with nothing for your troubles and have no legal recourse because some bureaucrat decided that it was better that way. So sorry, better luck next time.
Tell that to a former WaMu bondholder. I'm thinking they might hold a somewhat different opinion after losing everything despite the legal 'guarantee' that they would be repaid first.
Thank you for this comment. While it is true I am deeply concerned about the things you mention, the thrust of the article has been correctly seen by Smarty_Pants. I felt a need to revisit certain elements of the basic philosophy of a capitalist system; I felt that need because the core concepts are under direct assault and it is not being discussed enough here at SA. I don't want to speculate on whether the assault is deliberate or not. Capital is, first and foremost, private property. The nationalization of businesses and trampling of property rights must stop. I have no illusions either about the "temporary" nature of any of these measures.
How can anyone assess risk when legal protections are meaningless and the financial system is run by diktat?
On Jan 04 03:05 PM John Lounsbury wrote:
> SW Richmond - - -
>
>
> The risks you point out that current policies may lead to serious
> degardation of the value of the U.S. dollar, high or hyper inflation,
> and serious damage to the ability to fund our national deficitrs
> are recognized by many who do not share all of your economic and
> political philosophy. What others consider, and you do not, is how
> much destruction of commercial structure should be tolerated in trying
> to get the excesses shaken out.
On Jan 04 11:44 AM carey_jim wrote:
> Paradox: Even the powerful don't want to live in a world where justice
> is simply defined as "the advantage of the strong" and so we get
> philosophy, politics and economics.
>
> But the actors of history don't listen to the philosophers, as Plato
> found out 2500 years ago when he tried to advise a king in Sicily
> and barely escaped with his life, and as Winston Churchill found
> out 75 years ago when he warned the world about Adolph Hitler but
> got war and genocide instead of peace.
You should start studying the model, instead of being panicky about it. Please come and visit our productivity here in Austria/Germany - we will take it up with any US corporation easily.
We are just not as feightend about all the bad communist and terrorist and Germans and Nazis and Sharks and crocodiles .........
e.g. I was auditing US automotive plants, I can tell you some stories about non-productivity in comparison to Germany.
On Jan 04 02:46 PM iThinkBig wrote:
> The U.S. government will not prevent it's citizenship from returning
> to the Save and Invest model of that I am certain. If it continues
> devaluing it's currency you will see another super-spike in commodities,
> although I doubt we would see any effects this year.
>
> What is consistent is voter revolutions that occur four years after
> the start of the crisis. You cannot change or probably even influence
> what this crop of leadership does. If Americans want a nanny state
> like in Europe, they will get there wish. Many of us productive will
> simply work less, produce less to be taxed less to pay for a nanny
> state. I do not believe this will happen though.
John L used the phrase "destruction of commercial structure" whereas SWRichmond discusses "dilut[ion of] capital".
As SWRichmond described it, capital is saved work or the tangible item it is used to purchase. This is very much different from the "commercial structure" built around the ownership of that capital.
Similarly there is a difference between destruction of the 'commercial structure' and the destruction of the capital itself. The former is a changing of legal ownership, the latter is physical destruction.
Using a current hot topic as an example:
If GM goes bankrupt, the 'commercial structure' will be radically altered, but a great deal of the capital will remain. A bankruptcy, whether pre-negotiated or not, will serve to change ownership of the remaining capital but does not destroy it.
Toyota or Honda may purchase all the real estate and equipment from GM and use it in future production. The capital is still productive and helping to improve living standards. The 'commercial structure' of GM has indeed been destroyed and replaced by the purchaser, but the losses associated with the destruction are taken by those who 'own' GM or are GM's creditors, depending on the extent of the losses incurred.
This is far different from the actual destruction of the capital itself. Consider the industrial centers of Nazi Germany in the mid 1940s. That capital was physically destroyed by bombing and fire, yet today it has been replaced and is once again productive.
I guess my point is that a 'destruction of commercial structure' is a part of capitalism. Some capital is poorly utilized or mismanaged. Enterprises in this state are 'destroyed' via bankruptcy and the capital is transferred to other hands via known and established contractual procedures.
The far greater damage is done when the established procedures are made unknowable than when the capital's ownership changes hands.