Five Ways the Feds Undermined Capitalism

Oh my…there he goes again.

Yesterday, Donald J Trump dialled up his trade war.

Not to full retard…but at least 3/4 retard. As reported by Barron’s:

Stocks lost early gains and fell into the negative territory on Thursday as President Donald Trump tweeted that he will impose 10% tariffs on an additional $300 billion worth of imports from China.

We predicted (among other things) that Trump would never go ‘full retard’ in his trade war with China.

He has too much to lose — his reputation as a dealmaker, the next election… and his personal fortune.

All of them depend on more inflation — that is, on more money sloshing around the world to pump up asset prices and consumer living standards. That’s why he is pressuring the Federal Reserve to lower rates further and faster.

But Europe, Britain, Japan, China, and the US — all the world’s major economies — are already softening, slowing, and straining to move ahead. It’s inflate or die for them all.

Word on the street is that Trump is trying to bring the Chinese economy to its knees so it will be forced to make a deal. But what kind of bar poisons its best customer? What kind of con artist cons his own partner?

Knock out China and world trade slows. Prices drop. Inflation falls. And the US stock market falls, too…dragging the economy down with it.

People can’t pay their bills. Assets get dumped on the market — for pennies on the dollar. The global economy could go into a deep and desperate depression.

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American zenith

Our subject on Friday was what happened to cause GDP growth rates to decline — just as the feds were doing more than ever to push them up.

Never before have we gotten so little growth and paid so much for it. Why?

And why did the common man’s wages go down — in real terms –—just when capitalism was reaching its American zenith?

Was it those inscrutable Chinese? Those Mexican rapists and murderers? Did the gods turn against us? Or did our own feds stab us in the back?

Capitalism, of course, requires real capital. Real savings of time and output, not just pieces of green paper or electronic notations.

Without real savings, a capitalist economy has nothing to work with, nothing to build upon, no surplus that can be used to create more output.

Debt is not capital. Debt is anti-capital. It is tomorrow’s savings. It is money that hasn’t even been earned yet…let alone saved.

Every dollar of debt cancels out a dollar of savings. The more debt you have, the less real net savings you have to power the economy forward.

And today, the worldwide debt is about $250 trillion, more than three times world GDP.

Why so much? Because central banks encouraged it…and discouraged savings. But that is just the beginning.

Undermining capitalism

The feds — including the administration of Donald J Trump — have been undermining capitalism for years. Let us count the ways:

First, they made savings unnecessary by offering guaranteed pensions, free medical care, unemployment compensation, welfare, and easy credit.

In the financial markets, they offered the Greenspan Put, then the Bernanke, Yellen, and Powell Puts…reassuring investors that prices would never be allowed to stay down for long.

So, why set aside capital for a rainy day when the feds say they’ve stopped the rain forever? Net national savings rates have come down from 10% in the 1960s to barely 3% today.

Second, the feds made savings unprofitable. Yesterday, the Fed dropped its key rate down to the level of consumer price inflation, just above 2%.

At that rate, a saver earns zero. He might as well spend his money. That, of course, is the whole wrong-headed idea behind lowering interest rates — to lure consumers and businesses to waste capital rather than accumulate it.

Third, the feds encouraged capital destruction. The Fed’s low, short-term rates — negative in real terms for most of the last 10 years — led businesses to increase their debt load by 50%, to over $9 trillion. What did they do with the money? Bought their own shares!

When a corporation buys back its own stock, it is extinguishing capital. It can use its earnings to buy the shares.

Or it can borrow. Either way, it is turning corporate equity (capital) into spending money — for shareholders as well as management.

Here’s the latest from CNBC:

U.S. companies are on pace to break another record for share repurchases in 2019, using a combination of cash and debt to push the total to close to $1 trillion.

For the first time since the financial crisis, companies have given back more to shareholders than they are making in cash net of capital expenditures and interest payments, or free cash flow, according to Goldman Sachs calculations.

Zombie business

The Fed’s ultra-low interest rates also cause speculators to put real capital into goofball companies — such as Beyond Meat, Tesla, or WeWork — at outrageous prices. Cheap credit keeps these freaks and zombie businesses alive, destroying more and more capital.

When a company makes a loss, it takes valuable vital resources — most importantly, savings — and uses them to make products that are worth less than the resources that went into them.

In other words, they are destroying capital. Today, 29% of small businesses are making losses — the highest rate since 2008.

Fourth, the government destroyed capital directly. It takes savings and uses them to pay salaries, subsidise farmers, wage wars — and other wasteful projects.

The politicians and do-gooders like to talk about government ‘investing’ money. But it is rare that government spending produces any positive return at all.

Fifth, the Fed distorted critical price information. As George Gilder points out in his book The Scandal of Money: Why Wall Street Recovers but the Economy Never Does, market-set prices are crucial to a capitalist system. Fudge the information and the whole process gets perverted.

And today, thanks to the fake money, fake interest rates and fake prices, some of the highest fliers on the planet are no longer even trying to increase capital. Their whole business model aims to destroy it.

Ever hear of N26? No? Well, neither had we, until our colleague David Stockman quoted its CEO earlier this week:

…in all honesty, profitability is not one of our core metrics…in the years to come, we won’t see profitability. We’re not aiming to reach profitability.

Not aiming to reach profitability? What kind of company is this? What kind of crazy capitalism puts up with it?

And what kind of government aims to systematically destroy the one thing that prosperity depends on — capital?

More to come…


Bill Bonner,
For the The Rum Rebellion

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

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