Agora Financial’s Rude Awakening

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Ouzilly, France

• The greatest explosion of government red ink the planet had ever seen,
• Two essential ingredients for a decent public flim flam,
• Optimists, pessimists, illusionists, idealists and plenty more…

Joel Bowman, reporting from the Dubai, in the Middle East…

“Crowds won’t be that much of a problem,” your editor’s girlfriend assured us over dinner tonight.

“You’ll be a foot taller than everyone for a start,” she joked.

No, your editor is not a 7ft basketball part-timer (we can barely toss our work shirt to within ten feet of the hamper, let alone “shoot a hoop” with any accuracy). We were, rather, discussing the possibility of moving to Hong Kong after our stay here in Dubai.

“But being taller doesn’t mean there are any less people in the crowd,” your slightly taller-than-average editor assured his, ahem, petite partner. “It simply means we have a better view of just how crowded it really is.”

There are many angles from which to view the world, we figured, imagining millions of busy little Chinamen bustling about under our chin. The romantic sees it the way he thinks it ought to be, for example. The very same world is seen by the optimist as moving towards the way he thinks it ought to be. And still, the pessimist will perceive existence as somewhat closer in reality to what the miserable bum has wrought for himself.

The pragmatist, on the other hand, will see things for what they are. For him, death is not an occasion to waste life fearing, for it will certainly arrive, trepidation or not. The realist understands that along with a superior view of the crowd come lower back pain and the occasional bump on the head. Such is the invariable reality of being tall.

Still, bumps and pains aside, the pragmatist has the advantage of realizing, as a matter of fact, that things either exist…or they do not. And things that come into existence out of nothing usually don’t exist for very long, despite the feelings and emotions of optimists, pessimists, idealists, illusionists and the like.

A dollar, for example, is only as strong as the net position of the optimists (the buyers), measured against the net position of the pessimists (the sellers). But to the pragmatist, it is merely a piece of paper brandishing a dead president and carrying with it an I.O.U. from a broke government. Perhaps he can exchange it for a quart of milk today but, as the position of the pessimists gradually outweighs the position of the optimists, he will likely require two of them for tomorrow’s milk.

That leaves only the view of the idealists and illusionists. For that task, we turn you over to Bill Bonner and his take on a couple of politicians who thought they had what the world ought to be all figured out. Details below…

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Das Phony Kapital
By Bill Bonner

A good flim flam needs a good mountebank and a good mark. Two weeks ago, we pointed out that Wall Street was full of bright cads and dull sharks. Then, last week, we showed that conceited humbuggers run the central banks. Today, it is the politicians we come, not to bury, but to praise. They did their work well; they set up the marks.

The two great political figures of the last thirty years were Mrs. Thatcher and Mr. Reagan. These titans from the two sides of the Atlantic led the way to a new idea of how the world should work. Thenceforth, capitalism was king. But it was a new kind of capitalism they had crowned, one with a strange, unnatural face. It was not the old free enterprise, king of the jungle, red in tooth and claw. This new capitalism was more like the owner of a pet shop, where all the animals were cute and cuddly – and didn’t eat the customers.

Mrs. Thatcher and Mr. Reagan and their followers had seen how centrally planned economies worked; the Chinese and Russians showed what happened when bureaucrats ran an economy. The free market seemed like the best alternative. But the trouble was, these new ‘conservatives’ had no real respect for it. Instead of quaking before it in genuine fear and awe, like Moses before the burning bush, they began to believe that they could be its master. Then, they developed a whole host of fantasies about what this tamed beast could do for them.

Not only could the free market solve the problem of poverty, it could solve almost every other problem too. It was a social panacea. Just look at the wealthy countries, they said. Switzerland is clean and prosperous. By contrast, communist China is a dump. People are healthier and happier in capitalist countries, where they have better automobiles and lower birthrates. Science, supported by the free market, would find cures to diseases too…and even help people live longer. The logic was simple enough: free enterprise made people rich. And with their money, they could do wonders – cleaning up the factories, building hospitals and clinics, organizing public day care and Pilates classes…even getting rid of smoking!

Nothing was too absurd or contradictory for the True Believers. Gradually, they began to confuse the fruit with the tree…and then mistake the tree for a lamppost. Financial incentives were thought to be the key to everything. If an executive failed to maximize shareholder value, it was because his bonus was not large enough. If students showed poor test results, it was because teachers were paid by the job, not by the outcome. And if terrorists attacked a building in New York, it was because they lacked financial opportunities in Cairo. (Later, people were dumbfounded when doctors who had worked for the National Health Service tried to blow up cars in Glasgow and London.)

The ideas were slippery but they greased the skids. Soon, the marks were ready to go along with anything. Shareholders consented to hundreds of millions in bonuses and stock options for key executives. Investors signed up for hedge funds, willingly giving managers “2% and 20%” for putting quarters in the slot machine for them. Taxpayers allowed huge tax cuts – widely believed to be aiding the wealthy – because they looked forward to the day when they would be wealthy too. And almost everyone, everywhere eagerly went on a spending spree, in the belief that this new, kindler, gentler capitalism would add wealth faster than they could get rid of it. And if they overspent, hyper-capitalism would soon catch up.

In public finance, this delusion led to Dick Cheney’s famous quip: “Deficits don’t matter.” This, in turn, led to the greatest explosion of government red ink the planet had ever seen. During the first seven years of the George W. Bush administration, about $20 trillion was added to the U.S. ‘financing gap’ – more than under all America’s other presidents put together.

What was good for the top was good for the bottom. Private households, too, ran deficits of their own. Savings rates fell close to zero while U.S. household debt rose from less than $2 trillion in the first year of the Reagan administration to nearly $13 trillion in the 6th year of the present administration.

In Britain the story is about the same. Before the Thatcher revolution, household debt was about 65% of household income. By 1988, it had reached 100%. And by 2007, it was more than 150%.

When a consumer spends a dollar he earned, it is taken in as income to the businesses that receive it. But it offset by a cost too – a wage expense. But if the consumer spends a borrowed dollar, it comes to business like manna from heaven, with no balancing wage cost. Higher profits, greater leverage, more debt – it was all catnip to Wall Street. Financial assets were only 4.5 times GDP in 1980. Now they are 10 times as large. But that is nothing compared to the sugary confections of the credit industry. Credit default swaps, alone, are said to be worth $45 trillion.

The earnings of the financial sector equaled only 10% of total corporate earnings in 1980. By 2007, they made up 40% of the total, even though they still only employed 5% of the workforce.

But, “that game is now up,” says the Economist. The “new” capitalism was a fraud. It didn’t make people rich. It only allowed them to get rich – or poor – depending on what they did with it. Americans used their economic freedom to ruin themselves. But that’s just the way capitalism really works. You don’t get what you expect…or what you want; you get what you deserve.

[Joel's Note: We’re about 150% the way through Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics. That is to say, we’re re-reading it. The time for a sardonic take on the farcical circus of economics and politics is nigh, we reckon. With an election in full swing and an economy in downswing, all the characters in Bonner and co-author, Lila Rajiva’s book really do come to life.

Grab a copy of ‘Mobs’ for yourself right here and let us know what you think.

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[Rude Endnote: Seriously though…any thoughts on Hong Kong? Let us know.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening