Seeking Alpha

David Knox Barker's  Instablog

David Knox Barker
Send Message
David Knox Barker is the founder of Market Cycle Dynamics, LLC, and the publisher and editor of The International Market Cycle Dynamics Letter. Barker is one of the world's foremost experts on market cycles and the global economic long wave. He is the author of The K Wave; Profiting from the... More
My company:
Market Cycle Dynamics, LLC
My blog:
MCD Weekly Briefing Blog
My book:
The K Wave; Profiting from the Cyclical Booms and Busts in the Global Economy - eBook
  • Occupy Wall Street and the End of Crony Capitalism 0 comments
    Oct 21, 2011 11:54 AM

    Occupy Wall Street demonstrations are sweeping the globe. Universally, demonstrators recognize that there is something fundamentally flawed with the current system of international political economy. Most interesting, the left and the right agree on a few key issues. For decades, big business has bought and paid for political favors that have undermined the system, rotting the foundation of international free market capitalism. Hard work, individual responsibility and accountability are now optional. Just reward for success and the consequences of failure are now subject to political caprice. A civilization built on essential but abandoned principles is coming apart at the seams.

    Make no mistake about it capitalism is in peril. Occupy Wall Street demonstrators realize that the current system of crony capitalism is rigged. They intend to bring it down. However, before you throw in with the Occupy Wall Street movement, be aware that there are more forces afoot than being reported. An ill wind is blowing into the void produced by decades of failed policy. Far more radical elements than most are aware actually anticipated this global long wave debt collapse, and they are now seizing the day. Their plans are not a spontaneous movement of workers frustrated by a shortage of jobs and taxpayer funded banker bonuses. They have bigger fish to fry.

    Where

    Sure, the big banks are some of the biggest offenders in the current rigged system of crony capitalism, but they are not alone. The corruption, graft and greed are widespread. Many major corporations pay little or no taxes. They have secured their markets, revenues, and profits with tariffs, subsidies, loopholes and government contracts. Small businesses and entrepreneurs are in the trenches, creating most of the jobs in the global economy, paying higher taxes than the global franchise companies do. In the ancient Greek tradition of Atlas, they are carrying the weight of the world on their shoulders, a weight produced by politicians gone wild and their big business benefactors. They will not shrug off their destiny; they have their own revolutionary agenda.

    The focus of all the attention of the Occupy Wall Street movement is the big Wall Street banks that levered up and gambled with taxpayer-insured deposits. They lost big in global financial crisis of 2008-2009. Instead of punishment by the market for their failure and getting shutdown, broken up and divvied out to the many excellent and responsible bankers, most have now doubled down. They paid off their political stool pigeons, paid out bonuses for failure, and kept the taxpayer backstopped global debt poker game going, just a little bit longer. If they had engaged in these speculative activities with their own capital that would have been one thing, but they did so with taxpayer-insured deposits and minimal capital reserves. If bankers want to become hedge funds, more power to them, but taxpayers should not be at risk. The game of reshuffling the bad debt has now entered a new and dangerous phase; the stakes are higher than ever.

    Governments are now the house, fully insured by taxpayers, since no one believed governments, let alone the world’s only superpower, the United States, would commit financial suicide. Not fully appreciating the contradictions of the Keynesian mantra of government spending and borrowing, they failed to recognize that governments would also run out of money in a long wave global debt bust of demand destruction and dwindling tax receipts. Now the governments are in trouble, even the U.S., and the world teeters on the edge of the abyss once again.

    Crony capitalism became dominant only late in the 20th century, and is now unraveling rapidly, as evidenced by the folly of taxpayer loans to crony capitalists like Solyndra management, that couldn’t even survive 6 months on $500 million hard earned American taxpayer dollars. They even stiffed their lobbyists. It is a sad affair, but similar in many respects to the story of the Roman Empire. The redistribution of wealth in Rome was to both the financial elite class that bought off the politicians for their loopholes and exemptions to keep from paying their fair share, as the entitlement class was appeased with bread and circuses. In hardly a generation, they forgot the simple pleasures of a good steak and beer earned by the sweat of their brow.

    The great working middle-class of Rome paid the tab, until they buckled under the load. A system where losses are socialized and passed on to taxpayers, while winnings are privatized and go into the pockets of an elite financial class was clearly dysfunctional and destined for failure, so the Visigoths poured in and plundered. Rome was sacked, passing the destiny of humanity to the Renaissance and our civilization, which has now lost its way. The politicians and the captains of crony capitalism sowed the wind. They are now reaping the whirlwind.

    The bankers are quick to explain that they have paid back their TARP loans. However, ninety-six year old grandmother Barker will explain to you that it was done with zero rates on her deposits. She was paid nothing on her savings, while the bankers in the form of government bond purchases loaned her life savings, some earned during the last depression, to the politicians. A small spread on trillions in savers accounts around the world has added up to a bailout that rivals and may even be bigger than TARP before it is over, largely paid for by retirees that have paid their dues to society.

    The system of international crony capitalism has lasted only a few decades before it has begun to crumble due to its internal contradictions. However, the fraud is now recognized. The open “in your face” corruption was too much, and the demonstrators now march in the streets. It will not end here. Demonstrators invariably become protestors, who become rioters, who will embrace the growing call for revolution. It took decades, but by abandoning the basic and fundamental tenets of free market capitalism, political and business leaders have jeopardized the entire international political economy. They have delivered the global system to the doorstep of a socialist revolution.

    World leaders and their economic advisors do not appear to recognize the backside of a long wave debt cycle, even when they are sliding toward bankruptcy, default and ruin. They propose even more debt to solve a debt crisis. The economic long wave cycle is essentially a natural boom and bust Jubilee debt cycle that swings from the debt build up boom phase to debt deleveraging bust phase. The deleveraging can be a painful affair for all involved, but it must occur in order to move into the next long wave spring.

    It is certainly not the entire movement, but observers need to be aware that there are those involved with the Occupy Wall Street movements that have a socialist revolutionary agenda. There are socialists that understand the fundamental forces at work in the economic long wave, unlike their Keynesian brethren, and therefore are exploiting the forces at work in this crisis in an attempt to drive the final nails in the coffin of international free market capitalism. They actually advocate using each long wave wither season crisis to move closer to the final crisis of capitalism in the near future.

    There is a school of thought in international political economy that recognizes the powerful force that the long wave exerts on global economic activity and political trends. Immanuel Wallerstein created the world-systems analysis approach to international political economy. He proposes that we have been in a world economy, which throughout history and the rise and fall of civilizations has tended to give way to a redistributive world empire. Rome is the great example of this progression as discussed.

    The crony capitalism that emerged late in the 20th century, looks a lot like Wallerstein’s redistributive world empire, where risks are socialized and bread and circuses pacify the increasingly restless and desperate masses. However, the entitlement dependent groups of the civilization are only pacified to a point. Wallerstein and most of those that adhere to the world-systems analysis approach have socialist leanings. Wallerstein and others believe that during this current long wave winter crisis phase capitalism can be forced to compromise. It can be weakened sufficiently during this crisis, then during the next long wave winter crisis the final coup de grace for capitalism can be administered, and a final socialist revolution will sweep the globe, drowning the last capitalist in a sea of debt and the inability to generate a profit.

    Wallerstein insightfully identifies three key costs of the capitalist system. He recognizes that if these costs are increased sufficiently, it will result in the crippling of capitalism, bringing it to its knees. When this occurs, a new socialist world system can step in and take its place. Wallerstein identified 1) taxes, 2) raw material costs, and 3) labor costs, as the three key input costs of capitalism. He recognizes that if they can be increased, these rising costs will eventually choke the profits and life out of capitalism. A new socialist system, that has yet to be invented, will then emerge. Wallerstein has nailed it. These three costs are the key to the survival of capitalism. If these three costs are allowed to rise beyond a certain point, profits are destroyed and the capitalist system ceases to function. The long wave winter crisis is when protests allow the socialists to seize the day and raise the key costs.

    There are elements in the Occupy Wall Street movement that are seeking to take this crisis opportunity to cripple capitalism. Note the signs and interviews of the Occupy Wall Street movement. The themes are consistent; 1) higher taxes, 2) anti-carbon and carbon tax advocacy, which will radically raise the raw material and production costs to all of capitalism, and 3) higher wages that are not based on productivity and merit but need. Public and private unions are bankrolling the movement.

    Wallerstein, by pointing out the three costs that can be used to drive capitalism into the ground, has also effectively indentified the three key costs that can be targeted to not only end crony capitalism, but restore true international free market capitalism and produce the next global long wave boom. Those that want to end crony capitalism and return to true free market capitalism must join the fight for; 1) lower corporate and individual taxes, 2) reduced material costs through free trade and reduced regulation, and 3) performance and merit based pay.

    By reversing Wallerstein’s three costs to capitalism, a return to rapid growth and a genuine form of international free market capitalism can be achieved. Occupy Wall Street demonstrators are right, crony capitalism must be abandoned. If it is, job growth and standards of living will boom in the coming long wave spring season, but only if the right policy decisions are made.

    Wallerstein’s diagnoses is actually correct, the days of crony capitalism are numbered. Leaders have been weighed and found wanting. By correcting their mistakes and reversing all three of the key costs to capitalism, a new golden age for international free market capitalism will dawn. In my book Jubilee on Wall Street, An Optimistic Look at the Global Financial Crash, this path out of this long wave winter season was termed The Great Republic. Yes, a new golden age is not only possible; odds are rising rapidly for this outcome.

    Investors and traders need to realize that global markets are facing great danger. Free markets are essential to price discovery and a well-oiled and optimally functioning global economy. The ultimate outcome of the growing Occupy Wall Street movement will have a major impact on your investments. Tracking market cycles, including the long wave and the business cycles, is more important that ever. Political decisions could do massive damage to global financial markets, and that’s exactly what some want to see happen.

    President Obama needs to be careful throwing his hat in the ring with the Occupy Wall Street crowd without fully understanding all the forces at work, and their objectives. It could do more harm than good to his legacy. His pandering to protestors is a bit ironical in that his cuddling up to crony capitalist to fund his reelection war chest has even trumped that of his predecessors. However, it now appears that advocates of a new golden age for international free market capitalism and the rise of The Great Republic have a new champion for their cause.

    The U.S. presidential campaign of plain talking and straight shooting businessman Herman Cain appears to best represent the potential to bring about an end to the redistributive world empire and crony capitalism. Massive tax reform is required to ensure a long wave spring season and trigger a global boom. Cain may be able to convince both the left and the right of a better way.

    World-systems analysis suggests that crony capitalism will crumble during this global crisis, and the future of civilization is either a socialist revolution or alternatively, the dawn of The Great Republic and a new golden age. History is about to be made. Buckle up; it will be one wild ride as we sail deeper into the global long wave winter financial crisis and the U.S. election year of 2012. If Herman Cain drops the torch, a third party will likely be waiting in the wings to take his place, viva la revolution.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Back To David Knox Barker's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.