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.
