When I was a child, I was proud of my heritage and the fact that I counted among my distant relations none other than Otto Von Bismarck, the inventor of the modern welfare state as we know it today. As I matured and learned more about things like economics, math and the works of Charles Ponzi, I began to downplay my roots to Herr Bismarck.
Like a politician who’s largest campaign contributor was just pulled over by police, drunk and with the body of a teenage hooker in the trunk, it occurred to me that this connection wasn’t something I should be advertising. And really, he wasn’t a relative per se, it was via marriage. Barely a half-cousin at that.
Bismarck set out to create a pan-German state with progressive social ideals, groundbreaking at the time, and at first glance, would work in perpetuity (so long as the population and the real economy grew indefinitely). It created a social safety net and took a bit of the Darwinism out of life. It looked good on paper until populations realized they could vote themselves ever larger entitlements, and politics became a profession, one where it turned out you could advance your career by promising to redistribute other people’s money.
“Too little attention has been paid to the fact that electoral politics lures disorded, messianic personalities into positions of power.”
— Davidson & Rees-Mogg in The Sovereign Individual
Fast forward a couple hundred years and we arrive at the point which looks pretty close to the proverbial “end of the road”. All it took was barely a century of Keynesian suicide-economics and we’re at that place where there is no more road left to kick the can down. Not for lack of trying…it is possible that another decade, maybe even two more, can be eeked out of today’s sputtering system. But even then, the only thing we can say for sure is that the trainwreck then will be a lot worse than the one we’re experiencing now.
This century has been brought to you by the letter “E”, not for Enlightenment, unfortunately, but for Entitlement. The system is a mess and Everybody expects to be “made whole” in all this by Everybody Else.
- Labour unions want to lock in their annual raises and secure job guarantees, even if those jobs are to manufacture goods nobody wants to buy.
- Fast-buck traders are leveraged to the hilt and scream for “stimulus!” if the stock market commits the unthinkable and goes down.
- Governments refuse to allow the system to sputter out on their watch and hold interest rates down forcibly and wonder why nobody is investing or lending money.
- Massively indebted people who bought houses they didn’t need with money they didn’t have demand loan modifications and principle forgiveness on debts they themselves incurred.
- Banks and financial houses who blew themselves up demand bailouts lest we all end up “under martial law”.
- Central banks debase the currency with one hand, intervene in “free markets” with the other, monetize their own debt while simultaneously jawboning a “strong currency policy”.
There is one common element through all these themes and it is the flat out refusal of anybody to accept responsibility and the consequences of their own actions and decisions, lest the results become too stark.
Instead, more debt will be issued, the bill for all this will be handed off to future generations, and if anybody needs to cough up a down payment now, we can just confiscate it from “the rich”, who of course, have more than their “fair share” of the wealth in the world because (wait for it):
Capitalism is to blame.
Capitalism: the behavior in which people specialize in goods and services and then sell or trade those services to each other, with pricing set by the mutually agreed upon value, is the problem. So we are told. It creates…inequality. Somebody eventually ends up wealthier than most of the others, and this is not fair to the others. Want to know how we got into this mess? Look no further than “runaway free markets”.
The only problem with this premise, as I’ve lamented many times in the past:
Free markets, aren’t.
What passes for capitalism, isn’t.
What we have today is a type of government controlled cronyism, where free markets are only allowed to function if the outcomes benefit those closest to the political epicenter of the state. If it doesn’t, then a crime has been committed. Just ask Martin Armstrong.
What Destroyed the Roman Empire?
Martin Armstrong is a market analyst who spent a long time in prison for offending “the powers that be” and he has a lot to say on the subjects of government overreach, the economic cost of government and what he calls the cyclical pendulum between public and private interests. We live in an age where government everywhere is literally strangling the very economies they feed off of. His essay “What Destroyed Rome” is a must read:
The Decline & Fall of Rome was driven by the UNFUNDED guarantee of PENSIONS and like social security today, there was nothing actually put aside. It was always assumed that the state would be able to fund its promises. During the Republican days, 25 denarii paid 52 percent of the cost of his family’s annual needs for grain. By the 3rd century AD, it would take 6,000 denarii to create the same standard of living.
Inflation was the RESULT, not the SOURCE, which was the fiscal mismanagement of Rome.
Under Julius Caesar and Augustus, they established new pay standards whereas donatives (bonuses) to the military were paid in gold aurei. Such donatives paid to the troops were actually the spoils of war. This gradually was transformed into expected benefits even when there were no spoils. Tiberius and Caligula transformed donatives from rewards paid out of booty into regular bonuses. When a new emperor came to power, they bought the loyalty of the troops paying a donative upon their accession to the throne. Each paid donatives of 50 million denarii (by matching 25 million denarii in testamentary gifts of his predecessor).
…so What Would Ben Graham Do Now?
Benjamin Graham is the father of what is known as “value investing”, probably the most unglamorous, boring and slow-paced way to approach investing. It also happens to be the most effective method and many of the world’s most successful investors (including his protege Warren Buffet, more on him shortly) are some sort of “value investor” at heart.
Ben Graham coined the phrase “Mr. Market”, the manic, bi-polar business archetype who comes to you every day with a price in mind for shares of your company (or to sell you his shares) either despondently undervalued or hyper-enthusiastically overvalued, dependent entirely on his wildly swinging emotional states and devoid of any underlying measure of intrinsic value. (It is this gulf between those prices and actual values from which value investors extract their advantage …buying when all others are fearful and selling when all others are greedy).
In a recent book entitled What Would Ben Graham Do Now? Jeffery Towson, who cut his teeth as an investor working for Saudi billionaire Prince Al Waleed, poses the question: how would a Graham/Dodd style investment framework need to be modified to adapt to today’s globalized financial system?
Well for starters, he theorizes that one must adapt their investment methodology to accommodate a companion to Mr. Market: Mr. Government.
“If Mr. Market creates opportunities for investment by driving prices away from true value, his giant cousin, Mr. Government, can have an even bigger effect. Mr. Government can move prices but can also create large increases (and decreases) in the economic value of enterprises. If Mr. Market is bipolar in the short term but generally wise in the long term, Mr. Government is generally heavy-handed in the short term and slower to learn in the long term.”
While us free market purists may be mortified by this, Towson encourages us to accept this simply as the “new normal”
“Active government involvement in both markets and companies is common in many parts of the world. Dealing with the government is the norm, not the exception. And it should not be perceived as a risk or a problem, but as an opportunity.”
Indeed, perhaps even Warren Buffet himself has gotten with the program. His recent investment into Bank of America is being heralded by fans as a classic textbook Buffet-style investment but perhaps there may be another aspect to it:
Think The Buffet Investment In BAC Is Investing Savvy?
Think again. This sequence of events is not a coincidence, and it’s going to utilize your tax dollars to turn it into a quick home run for guys like Buffet: Monday: Buffet “discusses” the economy with Obama; Tues/Wed: Bank of America looks ready to collapse; Thursday very early: Buffet announces a $5 billion preferred stock investment in Bank of America, thereby addressing BAC’s immediate liquidity crisis; Thursday right after the Buffet announcement: the White House announces it is looking at a plan to bail out distressed residential mortgages. BAC just happens to be one of the largest holders of distressed residential mortgages. Think this is all a coincidence and Buffet is some kind of genius?
Buffet of course, as the son of a Republican congressman (one who was later betrayed by his own party….”They slit dad’s throat from ear-to-ear” the young Warren lamented to his sisters….) who himself briefly considered a run for president in the years after he had folded his original Buffet Partnership and returned capital (a lot of it) to shareholders …is no stranger to the political machine. Even I, an unabashed Buffet fan, find myself wondering if he would have been permitted to become the wealthiest man alive if he wasn’t? Say it isn’t so.
Ayn Rand once wrote an open letter to Soviet grandmaster Boris Spassky and asked him if it would be possible for him to do function at what he does if:
- The rules of the game could be changed arbitrarily
- If your moves had to be approved by a committee
- You had to play by one set of rules while your opponent played by laxer, preferential rules
- If winning was deemed selfish and thus the rewards of a given tournament were given to the losers of the chess games
The analogy between a rigged game of chess and a socialist paradise is a long one and I encourage all to read the full letter, but perhaps a more appropriate Ayn Rand quote for our discussion would be this one:
“When you see that trading is done, not by consent, but by compulsion – when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed”
If we don’t live in this world already, we are surely headed there.
Don’t blame capitalism, there’s no such thing.