Monday, February 1, 2010

Terrified of Capitalism: Cronyism, Corruption, and Pseudo Capitalism in America






The problem within America is rather simple: people don’t know up from down. Their basic ability to discern has been eroded by over a century of doubletalk, doublethink, and linguistic and lexicographical contortions which are better suited to the word salad of schizophrenics than they were for any debate or discussion amongst adults with full and intact mental faculties. Drop in on any discussion about politics on television and you’ll find poppycock masquerading as intelligent discourse.


Hyperbole abounds. The death of capitalism? We are all socialists now? I think not. We’ve all been socialists as far as our government and the basic services we’ve come to rely upon for some seventy years now. At heart, however, we are all capitalists. We go where the best deals are, or the merchants with the best deals come to us in order to meet our demand and turn a buck in the process.


However, there isn’t a legitimate capitalist enterprise to be found in this entire damned country. It’s all subsidized in one way or another. From the $2.5 billion spent annually on welfare benefits for Wal-Mart employees to the various tax breaks, subsidies, and an outright giveaways to every other retailer and business by state and local governments, subsidies are a fact of life in our socialist society, and therein lies the problem.


Wal-Mart delivers low prices not so much due to its ability to exploit market forces, but rather due to its unrivaled skill in exploiting county governments in order to extract the cost of construction for its supercenters back from the community by withholding sales tax receipts for a set number of years. Typically speaking, Wal-Mart doesn’t pay for its buildings. Your sales taxes do, along with the property taxes that Wal -Mart avoids paying. In short, a good deal of Wal-Mart’s margins and success are a direct result of its skill in extracting under the table concessions from local governments which leave their constituents in the dark.


I’m an unabashed capitalist. I find the idea of charging taxes to a corporation to be utterly counterproductive. This is due to the fact that I have a basic understanding of how corporations work in any society, regardless of its underlying economic philosophy (be it socialist or capitalist). Corporations externalize costs to the maximum degree possible, and a tax is a cost. Essentially, the corporation will not pay a tax. It will incorporate the cost of that tax into its pricing and its wages, and pass the cost of the tax on to its customers and its employees. There is no real way to prevent this from occurring. It’s a natural process of business no matter what sort of economic philosophy governs the market a business transacts within.


A tax on a corporation, then, is a hidden tax on customers who pay higher prices and workers who receive lower wages. It’s ultimately futile, as most populist sentiments are when sublimated into tax policy. And make no mistake about it, the corporate tax in all of its forms, whether an outright tax on profits or a tax on property, is nothing more than a populist sentiment. I aim my shotgun at the man, and I manage to shoot myself in the foot. This is the quintessence of all populist initiatives.


There are those who rationalize the corporate income tax as a tradeoff of sorts; a means to ensure that corporations pay something for the benefits they receive as business entities with limited liability. My point is this: only a person with a demented or incompetent mind would conceive of such an arrangement as a tradeoff. The corporation pays nothing. I guarantee you they externalize all of the taxes that they pay in the form of higher prices and reduced wages. They pay nothing; they receive everything. Where’s the trade?


The quality I find most attractive in capitalism is its realism; its acknowledgement that such arrangements are utterly counterproductive and represent something of an inefficiency within a market. Capitalism is an ultimately pragmatic theory that, when applied, seeks to eliminate inefficiencies. What results is simple enough to comprehend: increased efficiency in the form of lower costs, higher wages, and increased productivity which further lowers costs (and this in and of itself constitutes an increase in wages because your wages are able to purchase more goods and services).


Despite the elegant simplicity of capitalism, and its vast superiority when it comes to improving the lives of men, we as a nation are terrified at its implications because capitalism eliminates or punishes inefficiencies, and a good many of our behaviors constitute inefficiencies. Our willingness to live beyond our means with money we don’t really have to spend in the form of high interest lines of credit? Inefficient. In a truly capitalist society, we’ll go bankrupt and suffer greatly in the process. Our purchase of a home we cannot possibly afford based on the fact that we do not take in a proportionate income? Inefficient. Again, we’ll face insolvency and suffer greatly for our foolish behavior.


But that’s us, and we don’t have any real power. 90% of the publicly traded stock in this country is owned by 10% of the households. Somewhere around 80% of the overall wealth is concentrated within that same 10% of households as well, and it is from this narrow sliver of our society where the impetus for socialism originates. Our great misfortune as a country is that our wealthiest individuals and families are all the beneficiaries of socialism in one form or another.


Allow me to explain: socialism, at its core, is the removal of power from the broader swath of society in order to concentrate that power into the organ of government, ostensibly to help the greatest number of individuals within a society. It rarely accomplishes that goal of helping the greatest number. In every society where socialism has been implemented, including our own, its lasting and defining legacy has been the concentration of power and aid for the benefit of a small but privileged minority who seize the government in order to attain for themselves the benefits of the already concentrated power. The road to hell is paved with the noblest of intentions, and littered with the shattered lives of those unfortunate enough to receive the help of nobly intentioned individuals.


Once you cede power to a government, for whatever reason, you swell its ability to influence outcomes. You may have intended for those outcomes to be tilted in the favor of the majority, but the reality is that eventually, the minority will find a way to corrupt the government and seize that already concentrated power in order to work it for their own benefit. They seek efficiencies, and what could be more efficient to the task of working your own will than to seize that body which holds most or all of the power within a society?


That is exactly what happened within our society decades ago. Beginning with the Federal Reserve, which I’d like to refer to as the biggest welfare program in our history, we ceded power to entities within our government in order to accomplish noble agendas. In the case of the Federal Reserve, we wanted to protect the value of our money and to ensure full employment. Let us be frank, because being tom would make us turkeys: full employment, like Heaven, is not be seen in this life or on this earth. It’s an unreasonable thing to expect. Unemployment has always existed; however, full employment has never existed unless you count those two original inhabitants of the Garden and the angelic choirs before them. On the former count, we may objectively say that the Federal Reserve has failed. The dollar has lost 96% of its value since the inception of the Federal Reserve.


These two realities demand that we ask the question “Why?” when it comes to the continued existence of the Federal Reserve. If full employment isn’t attainable or even reasonable to expect, and the value of the dollar been so thoroughly desecrated and plundered, why to we keep the Federal Reserve around? Well, we don’t keep anything around or send it packing. Again, as I said before, we may have a majority in numbers, but we clearly don’t set policy or hold real power. Therefore, the reason the Federal Reserve exists has little if anything to do with the broader segment of American society.


The continued existence of the Federal Reserve depends largely on its ability to answer the needs of those who do set policy and hold real power; those within the top 10% of American households in terms of capital who wish to maintain and enhance their already considerable wealth. You see, it is useful to have an institution like the Federal Reserve at one’s disposal when one makes a mistake in the marketplace.


The Federal Reserve is the bank to end all banks, or the bank to keep all banks going even when those banks should be shut down due to insolvency or over leveraged positions. It has the ability to print money, and that ability means that the Federal Reserve matters more to your bottom line and the bottom lines of the wealthy more than all of the other institutions of government combined.


Let us say that you’re carrying a dollar around in your pocket way back when, say, back in 1980. Your father gave you a dollar because you’d completed your chores or made a good grade. Like a good child, you watched your father and his father, and you noticed that they were thrifty individuals who saved their money. They didn’t live beyond their means. Let’s say you put your dollar away until the year 2009 in your piggybank.


When 2009 came around, you cracked open your piggybank to discover that you had exactly thirty-six cents. You were aghast. Someone had robbed your piggybank! Sixty-four cents was missing! Perhaps you didn’t get upset, because you were an adult , and sixty-four cents wasn’t a lot of money, all in all. But let’s say your father gave you a hundred dollars at the end of a summer of work in 1980, and you opened your piggybank to discover that sixty four dollars was missing. Would you be upset?


That’s the power of the Federal Reserve. Without ever once taking a dime physically from you, they have the power to reduce the one hundred dollars you made in 1980 to just thirty six dollars of purchasing power in 2009. The way that they do this is by expanding the amount of dollars in circulation, thereby devaluing those dollars which are already in circulation. But why, you ask? Why would they need to expand the money supply and devalue my hard earned money?


The answer is simple: rich people screwed up. They screwed up with real estate bubble in the 1980s because the thrift industry (a type of banking industry) was deregulated, and the Federal Reserve printed up a lot of dollars in order to get the money flowing so that people would buy things. One of the things people bought a lot of was real estate. They thought that the prices would keep going up, and that demand driven by the cheap and widely available credit extended when the Federal Reserve expanded the money supply would continue to go up. It looked like a great investment.


However, those people bought their investments on credit, which meant that they owed money. The less you need money, the more money you can get from a bank . You’re a prime borrower. So the vast majority of those engaged in real estate speculation were already rich. They could get vast sums of credit extended to them because the banks viewed them as a good risk. When the Federal Reserve began to tighten the money supply in order to control inflation (that devaluation of the dollar which was driving prices up and making it difficult for the public to afford the necessities of life) credit was no longer available. Without credit, demand dried up.


And so we were left with a bunch of rich people who owed a lot of money on their investments. They had no prospect of getting rid of their investments or their liabilities on those investments. Now, when you or I owe a lot of money, it’s not a big deal to the federal government. But when someone rich owes a lot of money, it’s a very big deal to the federal government. Their lot of money is a lot bigger than our lot of money, because they can borrow more to begin with.


The banks were left holding empty loans with borrowers who couldn’t afford to pay back what they owed. Banks began to hold back their assets and build their reserves to deal with the losses. This meant that rich people couldn’t borrow money to run their businesses from quarter to quarter. Those businesses started to collapse because they couldn’t get financing. And your father and my father started getting laid off because their companies couldn’t afford to employ them.


It was an economic crisis. Rich people were getting hosed by their own bad decision making where investments were concerned, and the consequences were starting to seep down to their employers. Enter the federal government and the Federal Reserve! They provided a bailout to the rich people, which enabled them to start running their banks and their businesses again. The way that the bailout was paid for was two-fold: the Federal Reserve printed some money, and the federal government borrowed some money.


Both options resulted in your being on the hook for more money in the end. Now, you may hem; you may haw; you may protest; you may even resort to accusing corporations and the rich of stealing the government from the people. However, none of these accusations are true in the slightest. The rich paid a great deal of money for the government. More than it was worth, to be honest. It’s only fair that they would get their utility out of the purchase. In all truth, I’m amazed at their capacity to overbid and still be in business. The individuals who run our businesses and our economy clearly don’t understand the basics of appraising value. They overpay at every turn. Maybe it’s a prestige thing. I digress.


The reality is that the rich gambled, and gambled wrong, but they managed to pass their liabilities on to you. Don’t blame them for doing so. They had such a fine model to emulate. Just as the corporations they owned externalized costs to labor and consumers, the rich shareholders realized that by appropriating the government and the capacity to print the nation’s money, they could externalize their losses in business to the rest of us.


Mayer Amschel Rothshild, a banker, put it succinctly enough: “Give me control of a nation’s money and I care not who makes the laws.” Control of the money isn’t with our democratically elected government. It’s with the Federal Reserve, an independent central bank owned by shareholders like Citi and JP Morgan Chase, who are in turn largely owned by that top 10% shareholder class.


The Federal Reserve has monopoly control over the monetary supply, and monopoly control is very important in socialist systems. It effectively removes any challenge to an institution’s dominant position. The status quo can be maintained ad infinitum et nauseam.


Effectively, what you have is a status quo in this country that does not work according to the stated justification for its existence. The Federal Reserve has never maintained either full employment or the value of the dollar over time. From a purely economic standpoint, there is no reason for the Federal Reserve to exist. It’s an inefficiency on the marketplace. With 21 economic downturns in the past 110 years (an average of 1 downturn every five years or so, and each one corresponds to the Federal Reserve’s decisions to expand our monetary supply and usher in inflationary bubble pricing), along with an utterly miserable record of dollar devaluation, no objectively minded individual can defend the Federal Reserve.


The only reason for the Federal Reserve to exist is to provide a cushion for the gambling predilections of the very wealthy. When they overextend themselves and their companies, the Federal Reserve is always there to provide a nice cushion of extra liquidity so that the impact can be lessened and the status quo can be maintained.


It’s welfare. If you’re the typical red-blooded American who gets livid every time you hear reports of welfare mothers having more and more children in order to get greater benefits, you ought to get really hot when you realize that corporate welfare and the sort of monetary welfare the Fed provides has raised and nurtured entire dynasties in American business. There are blue-blood American families who would have been done in by their bad business decisions and strategies had they been left to the mercies of the market. The Fed stepped in, along with the Treasury Department, and did what had to be done in order to salvage their futures. They devalued the money in your pocket, and made the prices for basic goods and services go up in the process. They made it harder for you to survive and get by so that others wouldn’t have to face the consequences of their actions and decisions.


Their sons and daughters went on to continued wealth and privilege, while yours struggled to make it in a world where the prospects for a good job and a career seemed ever more bleak. And you sat back and steamed, but you were more angry about those images on the television of individuals who seemed indolent and remarkably fertile at the same time. But think of this: welfare, like violence, only begets more welfare.


You’ve probably never asked yourself why it is that we need a minimum wage or collective bargaining in the form of unions. You’ve probably never asked yourself why it is that the minimum wage has to be raised from time to time. If you have, you’ve likely come to the conclusion that the individuals who make those wages or who go on strike are just functioning off of a sense of entitlement. Politicians are trying to buy their vote, and so they let them do more or less as they please and throw them a few favors in the form of a minimum wage increase from time to time.


To some degree, that’s true. But ask yourself this: how terrified is a politician of someone who makes $7.25 an hour? How concerned is an incumbent about alienating a base of support that doesn’t really vote with any regularity or frequency, and can be counted on regardless due to the fact that they exist within a voting bloc that traditionally votes a straight line one way or the other? He isn’t likely to be all that concerned.


Likewise, how terrified is a politician of the union vote? In the 2006 elections, Congressional elections were funded with $1.4 billion in contributions. Of those contributions, just 14% came from labor interests. 79% came from business.


In all truth, less than 1/10th of 1 percent of the American population funded the entire amount of those elections based on the publicly available record. We have the minimum wage and the unions in this country precisely for the same reason we have the Federal Reserve: it’s all a welfare game. You cannot ask someone to accept a minimum wage of $4.25 an hour when you’re pursuing ruinous monetary policies that reduce the purchasing power of that wage by some 64% over a 29 year period. Even if their wages are raised, those wages won’t be raised by an amount that outpaces or exceeds inflation.


None of this is capitalism. It’s pure socialism, plain and simple, and it doesn’t work. Despite two New Deals, A New Frontier, a Great Society, a City on a Hill, and a Contract with America, we’ve had one trend continue unabated through the past 70 years: the rich keep getting a greater portion of the national economic output, and the poor keep getting a smaller portion of that output.


You judge an initiative or a philosophy by its results when the initiative or philosophy in question is applied into action. Those results are an unqualified disaster. The advocates of our current arrangement would point you to their intent. Their intent is always to help, at least on the surface, but their end result is nothing short of destruction. In thirty years, Reagan era policies of spending while cutting taxes and deregulating without considering the potential consequences have led us to a shrinking middle class and a decimated class of poor.


Much of this is due to a core misunderstanding of what capitalism posits. It does not posit unrestrained corporate power. It instead posits unrestrained markets, where the business that innovates the most and meets demand with the greatest degree of efficiency will succeed to a greater degree than its competitors.


Deregulation does not necessarily equal out to capitalism. I would argue that much of the deregulation that we have had in the past three decades has been an extension of socialism to the extent that it favored the largest companies in a particular industry at the expense of all else, including market forces like demand and supply. The only thing I’ve seen a great deal of innovation in with deregulation over the past thirty years is in consolidation and mergers. The end products that are delivered to market are not particularly good and they certainly aren’t delivered more cheaply and efficiently.


Take cable television, for instance. The price has more than doubled over the past decade in many markets, and the number of providers has generally gone down until one or two have come to divvy up towns and cities amongst themselves. The price of premium cable has outpaced inflation, but what’s more telling is that it has outpaced inflation when productivity gains within the core technologies associated with its delivery (namely, processors, servers, and various types of cable) should have driven the price downward. Something is amiss. With productivity gains, prices go down because you can do more with less initial input. For whatever reason, this reality isn’t sublimating into a reduced price on your cable bill.


The challengers to cable generally center on satellite technology, which can be spotty to non-existent during periods of inclement weather. Their price is somewhat better than cable, but the truth of the matter is that given market forces and productivity gains, it isn’t as good as it should be.


There are two things to note here: one, monetary manipulation through a central bank leads to upward trends in pricing; two, a reduction in competition will inevitably lead to higher prices as one company assumes total control of the pricing structure for a good or service. The cost of your cable will go up over time because your dollar is being devalued by inflation as the Federal Reserve continues to subsidize and offset the consequences of foolish misadventures by the wealthy investors.

Since 1980, with annualized inflation averaging around 3.54%, you have lost 64% of your dollar’s purchasing power. That’s the baseline of your cost increase. However, since 1980, we’ve seen staggering gains in productivity across the technology sector. We’ve seen a doubling of processing power every two years. This means that it costs far less to do more when it comes to computers, laptops, and video technology. Today, you can buy a video camera that will record in full HD for a fourth to a fifth of the price of older VHS video cameras, even with the stunning devaluation of the dollar and the fact that the HD cameras are many times more powerful. That’s productivity in action.


More than monetary manipulation, more than tax policy, more than any notion held by a government bureaucrat about the efficacy of this theory or that theory, productivity unleashes wealth by enabling men to do more and have more with less effort. But you don’t see that in certain industries. All of these industries have one of two things in common: either deregulation has occurred and led to extraordinary consolidation and the emergence of a small group of dominant players within a particular sector, or an antitrust exemption exists which exempts the entire industry from laws which prohibit company behavior that stifles or excludes innovation or competition.


With the former you can explain the rising costs in the cable industry, and with the latter you can explain the exploding costs in healthcare and the unbelievable rise in the cost of professional sports tickets. Encouraging consolidation or exempting an industry from the forces of competition and innovation has the unified effect of driving prices up. The industries will forever layer on artificial costs in the form of added bureaucracies, processes, and compensation.

Every instance of deregulation occurring in the past thirty years has one characteristic in common: it was sought not by consumers, but by industry. There is never an industry interest in lowering prices if lowering prices can be avoided. If a company can reduce costs but raise prices due to a legislative loophole in a deregulation bill, it will do so without hesitation.


Another common characteristic of deregulation has been implosion. Whether in the Savings and Loans, the telecommunications companies, the energy and utilities companies, or the banking industry, the conclusion of deregulation has always been a massive revelation of fraud and unethical behavior. Yet it is rare to see any real effort to go after the perpetrators in a systematic or broad based effort. Most of the offenders responsible escape with their ill gotten gains. Crime pays in a socialist society, so long as you’re a member or an affiliate of the ruling class.


Moreover, the deregulation of the past three decades has depended largely on the suspension of market forces. Each of the companies that I could point to has resorted to obfuscation and fraud to obscure its true fiscal picture from investors who would have done the job for us if only they had possessed access to the real figures underlying the company’s performance. Enron, Global Crossing, Worldcom, and countless others would have never gotten to the point where their implosion had such far reaching consequences had investors but known from the onset what those companies really were. Those companies would have failed in the marketplace a lot sooner, and with a lot less pain to the overall economy had we simply rested our economy on capitalist principles and insisted on financial transparency.


The success of each of those companies was never real. It was built on fraud, and it is entirely appropriate to go after the assets of executives who committed a crime or investors who reaped profits from fraud based earnings statements. Limited liability was meant for civil actions rather than criminal actions, and the net effect of applying limited liability to instances where fraud has been committed is that you effectively erect a financial incentive to commit fraud! The fact that investors did not know about the fraud and were not witting participants is irrelevant: the earnings that they pocketed were never real to begin with. They aren’t entitled to phantom proceeds.


There are two ways of viewing the issue. One is to say that the investor, like a man in a casino, to a chance and lost. He gambled and he came up short. The second way is to say that the investor could look to the marketplace for some form of protection in the form of fraud insurance on his investments. If an insurer wants to take on the potential risk and the certain revenue, so be it. It’s a private solution to what I would consider a private problem; therefore, it is entirely appropriate. I would venture to further suggest that an added advantage of such an arrangement is that the U.S. government doesn’t have to erect an entire bureaucracy or a fund make investors whole. The same approach could be taken with creditors as well. You could merely come in to a company that was insolvent, take over its assets, sell those assets on the open market to the highest bidder, and strip both creditors and investors of any value. It’s simple, direct, and avoids the hassles.


When you allow an culture of fraud and obfuscation to proliferate in your economy, you are essentially inviting economic catastrophe. Investors cannot have confidence in earnings statements, and they are less likely to invest their money in your markets. Since investment is the main driver of economies the world over, you must maintain investor confidence. In a socialized economy like our own, the way in which investors are reassured is simple enough: government bailouts backstopped by a central bank ready to pour liquidity out in order to drown whatever problems may arise in paper money.


This is wrong. Investors ought to be certain that our markets are sound because our disclosure and transparency is unrivaled. Fraud should not be tolerated, but it is. It is tolerated because in fraud there is opportunity to represent stratospheric earnings to potential investors in order to encourage them to invest and thereby further raise the company’s stock price, which only further enriches executives who derive obscene bonuses out of the arrangement. Let me be clear: the bonuses are not obscene because of the size; they are obscene because they are not connected to real long term performance and growth. Too often, they are the direct result of fraudulent numbers in the short term that will be restated later on.


The recent economic crisis was not unforeseeable. The FBI was warning the regulatory agencies who oversee our nation’s economy and its businesses of the pandemic levels of fraud occurring in mortgage origination. The loans issued were based on fraudulent applications with income levels that had been boosted by dishonest mortgage officers who committed criminal acts. More than anything else besides monetary manipulation, this was a crisis with a foundation of fraud.

Socialism depends on fraud for the illusion of success. We could go back to 1980, when the entire U.S. economy produced $5.2 trillion per year. Today, that economy produces something on the order of $15 trillion per year. However, you must understand that the metric used to measure production, the dollar, has been devalued by some 64% over that span of time. When you factor in this devaluation, what you are left with is an economy of just $5.85 trillion in 1980 dollars, and a 30 year track record which does not indicate a tripling of our economy in size, but a gain of less than 14% over a 30 year period. It is not impressive at all.


When you extrapolate that number to the rest of the world, especially countries like China which rely upon self-devaluation of their currency in order to make their exports attractive, what you are left with is the realization that the global economy in general simply isn’t that impressive. The reality is that any gains in real wealth can only be measured by productivity as opposed to a fluctuating currency that can be manipulated by fiat.


Productivity is our salvation. Were it not for gains in productivity over the past thirty years, we would have felt the pain of inflation to an unimaginable degree here in the United States. As it stands, the pain of inflation has been offset here, but passed on to countries like China who devalue their currency in order to gain traction in our market. There is only one problem with China’s approach: it is heaping up for itself another revolution, as its population bifurcates into two extremes: the wealthy and the working poor.


The simple truth is that China is not a worker’s paradise. In order to gain power for Beijing, its people are being enslaved by a currency strategy that results in cheaper goods abroad and rising prices at home. Much of what goes on in China depends on the maintenance of an illusion. The simple truth is that China’s currency, as devalued as it is, is only devalued just enough to make exports cheaper. It is actually a currency rotted through.


China’s real estate market will be the next great crisis area. The problem with manipulating liquidity in order to make your exports cheap abroad is two-fold: first, you flood your markets with money, thereby creating artificial demand with excess liquidity; second, by creating that demand you drive up prices for assets that appear to be scarce in an economic environment where excess liquidity is the rule. In short, you create a bubble, and all bubbles must eventually burst.


To some degree, China’s bubble began to recede when the economic crisis first hit. However, when its government began to flood its domestic market with liquidity in order to stimulate demand, it further exacerbated the problem. When you couple this reality with the fact that China’s currency was already overextended, you have yourself a recipe for utter destruction. Moreover, the fact that China is one of the world’s worst markets as far as corruption goes only magnifies the problem that China faces. There is little if any protection of intellectual property in China, and more importantly, there are no significant mechanisms in place to prevent fraud.

If I were an investor, I would position myself to profit from a Chinese unraveling. The numbers aren’t real. They aren’t real from within China due to rampant currency manipulation, and they aren’t real abroad in markets that consume Chinese goods because those markets are all flush with liquidity at the moment and the liquidity stimulates artificial as opposed to real demand. Another issue for Chinese central planners is that their exports of building materials and finished goods have tremendous quality control problems. There is lead and cadmium in children’s toys and jewelry, and Chinese manufactured drywall has recently made the news as well for quality issues. My personal view is that the Chinese economy is due for a 35% correction at the least and perhaps even a correction of some 50%.


Moreover, a good many of the cutting edge technologies that you see coming out of China simply have no real world equivalent demand. From solar panels to electric cars, there simply is no equivalent consumer market for what the Chinese are pushing. Yes, the products are impressive, and the capacity of the Chinese manufacturing sector to mass produce them is staggering, but there is no customer base proportionate to that mass production capacity. How do you sell a good you can mass produce if you lack mass demand in the form of real customers?


A troubling trend of class resentment is also on the rise within Chinese society, and the potential social impact of this resentment will eventually translate into economic consequences. In a recent poll, some 97% of respondents indicated that they disliked the wealthy. That’s an astonishing number. It’s indicative of a destabilizing inequity of wealth, and the fact that the lower classes within China are beginning to realize that the boom isn’t translating into greater wealth where they are concerned.


Given that the wealthy within China, like all other communist societies, tend to be beneficiaries of close relationships with the political bureaucracy in Beijing and in local governments, the reality is that China is poised for a meltdown in which the Communist Party itself will be identified with the endemic corruption which characterizes Chinese industry and business.


All of the ingredients are present for a Chinese unraveling. All that remains is for some group of speculators and traders with knowledge of how to penetrate the Chinese market through ostensible trade and investment to piggyback other currencies into China and engage in monetary manipulation of their own. There is some indication that this is already occurring. The reality of the matter is that the renminbi is not fully convertible; however, China continues to move towards convertibility in incremental steps. A convertible currency will be the Pandora’s box for China, and the one ingredient that could act as a real catalyst for an expedited collapse.


Systemic corruption and fraud are inefficiencies within a market, as are artificial valuations through currency manipulation, and as soon as speculators gain the ability to punish China by exercising their peculiar brand of discipline, they will. They will be unable to resist the lure of potential profits in the hundreds of billions of dollars. Imagine the late 90s Asian currency collapse, only on a much greater order of magnitude.


The truth is that Chinese productivity isn’t all that impressive in that it relies upon artificially depressed wages and a devalued currency in order to produce goods more cheaply for foreign markets. Without currency manipulation, the Chinese simply are not competitive. Then again, no one in the world is competitive without currency manipulation. The entirety of the world economy relies on currency manipulation and reciprocal reactions or failures to react between countries that transact commerce betwixt themselves.


Gluts of liquidity combined with systemic corruption leave countries vulnerable to corrections from the speculators and traders who can raid their markets and leave them imploded in a matter of days or weeks. Inefficiency is a sin; like all other sins, it must be punished severely. The only thing that can prevent the day of atonement is an artificial barrier erected by a government, such as the lack of full convertibility for currency. Partial penetration of the market remains possible in the form of securities and bonds.


Moreover, the problem of the Chinese government’s obstinacy towards institutional and individual investors is well documented. You may trade in Hong Kong or in mainland China, but if your trade’s result or implications happens to run afoul of local or central officials and regulators, your funds are frozen. The implications for banks are obvious: you may put funds into China, but you will be unable to take them out based on the mere whims of a tyrannical bureaucrat.


Autocratic societies produce unaccountable autocrats who answer to no one. The problem for China is this: if it continues to allow the petty grievances of local autocrats who do not comprehend basic investment and trading to dictate whether or not investors can withdraw their legitimate gains from Chinese accounts, it will inevitably scare off outside capital investment. At the renminbi is starved of value due to voluntarily imposed inflation by the Chinese government, the outside currencies are essential to the strategy of the Chinese government when it comes to securing raw materials and energy supplies necessary to Chinese development. Who among the OPEC nations wants to be paid in Chinese currency? For that matter, who wants to be paid in renminbis at all?


The point is that the market, even when it is obstructed and interfered with, always finds a way to sort out the truth. Short term deceptions are possible, but eventually, the market ferrets out the weak or the insolvent and exposes them for what they are. Every lie will eventually be revealed, and consequences will follow.


Socialists would like to pretend otherwise, but the fact remains that their own track record would suggest that all lies are eventually exposed. What socialism and mixed market economists ultimately attempt to do is quite simple: interfere with the metrics by which the truth is gleaned or quantified. The devaluation of currency through voluntary inflation is the chief way in which a socialist attempts to deceive.


You may have a long and costly war without tax increases, but your money will be devalued as your central bank prints up currency to pay for the costs of the war. Whatever percentage your money loses in value is effectively a tax, but since you don’t see it in the traditional way, such as a filing in April, you don’t regard it as such. All you see are the rising prices at the grocery store and the gas station.


Moreover, as governments spend on this initiative and that initiative and pretend that they can forever address this or that social ill by spending that far exceeds their revenues, the people see higher interest rates which render basic dreams of self-sustainment and financial independence out of their reach. Home ownership, the purchase of a new car, the financing of higher education or vocational training, all of these grow ever more expensive and ever more difficult to attain for the average person as national deficits rise because the investors who purchase the government bonds demand a higher return in order to assume a greater risk that the government will default on its skyrocketing debt. The government and the central bank then pass on the higher interest rates to everyone who borrows.


It becomes ever more expensive to finance the interest alone on such debt. Do you realize that for what we pay in interest on the national debt, we could provide healthcare for every man, woman, and child in this nation from the cradle to the grave? Whether or not you agree with taxpayer funded, government managed, universal healthcare, you have to admit that the costs associated with the national debt are stunning to comprehend. And what have we really gained in exchange for that debt?


The debate is largely a philosophical one, but with practical implications for all of us. What it comes down to is this: who’s better at determining what’s best for the individual? Is it the government, or the individual himself acting in his own rational self-interest? Can a bureaucracy that makes wide generalizations provide a better path to prosperity for the individual than the individual himself?


Do you believe in yourself, or do you believe in the government? Is your belief in the government justified? Let’s review: two attacks on the World Trade Center in under a decade, the second of which demolished the buildings for good. Out of the past forty years, we’ve had two years of budget surpluses, and those surpluses were an illusion because the actual budget did run at a deficit before the Social Security surplus was loaned to Congress to make up the difference as required by law.


The government can’t get Osama bin Laden; moreover, it can’t deliver goods and services to our citizens after a major hurricane in a timely and expedient fashion that bespeaks to its competency. Consider that the hurricane itself was a minor one, but it was exacerbated by infrastructure projects which dredged a ship channel through wetlands, thereby funneling the storm surge into the heart of New Orleans, where the levees designed and built by the government collapsed under the surge of water they were supposedly designed to tolerate and withstand.


In the name of defending the value of the dollar and maintaining full employment, our government gave the Federal Reserve monopoly control over the printing of our money. Since the inception of the Federal Reserve, the dollar has lost 96% of its value. We’ve never had full employment.


We’ve had 21 recessionary periods in the past 110 years. That is an average of 1 recession just over every half-decade.

The government attempted to save a few foundering pensions with the Employee Retirement and Savings Act, which constructed the Pension Benefit and Guaranty Corporation, an entity designed to assume the costs of operating defunct pensions in order to ensure pensioners received their benefits. Corporations began jettisoning their pensions left and right, until there were few if any left. Nowadays, instead of funding your retirement with a slice of the profits you help to earn your employer, your take-home wages are depleted in order to fund a 401(k) fund which is then invested in that very same market that has an downturn once every half-decade. Government at work.


The government further sanctions the existence of an organization which, by its own disclosures to oversight committees in Congress, commits some 100,000 violations of the law every single year. That organization operates abroad in hundreds of countries and localities, where its agents kidnap, torture, kill, and heap a ton of resentment toward U.S. civilians in the process. It’s the CIA.


Your government claims for itself the power to incarcerate you without hearings or the disclosure of the evidence against you; it further claims to be able to deny you access not only to a lawyer, but also to the charges as well.


The government claims that stimulus packages for ordinary citizens can take months or even years to distribute and roll out, but it managed to distribute over $10 trillion in under three months to banks that likely didn’t need the bailout to begin with and will not be reformed or rehabilitated by the bailout.


The largest spender and the biggest customer in our supposedly free market economy is the U.S. Federal Government. It’s the most expensive government in the world, actually. Our defense budget is some 8 times that of our nearest competitor. Most of the over $700 billion in annual largesse doesn’t go towards keeping us safe and ensuring that terrorists don’t get into the country to kill ordinary Americans. It goes to support over 1,000 outposts and bases in the world. The Pentagon now has the distinction of being the world’s largest landowner.


Our navy is larger than the next 13 navies in the world combined. 11 of those 13 navies belong to countries that are allied with us.


Our government often spends more on corporate welfare in the form of subsidies and tax breaks than it takes in in actual tax revenue. Its subsidies for agricultural were ostensibly to save the family farm. Today, the four top farms produce some 80% of the beef, 60% of the pork, and 50% of the chicken, while family farms are drowning in debt and near extinction. As food has become mass produced, we’ve seen ever greater rates of obsesity, diabetes, and heart disease.


It is absurd to portray this reality and this track record as successful. When a government’s stated goals at the outset conflicted with the end results of a policy or program, it is entirely fair to call the program a failure. It is entirely fair to look at our government and its overall record and call it a failure as a bureaucracy and an institution.


What is thoroughly wrongheaded, though, is to attribute the failings of this government in any way to the free market. The government and the interests it upheld, those of the top 10% shareholder class, consisted of individuals who were always opposed to capitalism and utterly terrified of it.


That’s not to say that they aren’t smart. The current situation in this country is a brilliant scheme to benefit the very few at the expense of the majority. One of the central figures of the scheme is its backhanded benefit to regular people. Take the mortgage interest tax deduction, for example. It allows homeowners to deduct the interest on their home mortgages every year, ostensibly to incentivize home ownership.


Now take something else that you’ve likely never heard of: the Miller Modigliani Capital Asset Pricing Model, which essentially says that you cannot raise the value of a business with increases in debt unless the debt receives favorable treatment under the tax code relative to equity. Essentially, the mortgage interest tax deduction is a favorable treatment of debt under the tax code relative to equity that encourages banks and developers to borrow regardless of demand because they can essentially book the deduction as an increase in their business’s value.


The net effect of this is as follows: when a real estate developer takes on many times his equity or asset base in debt, he’s actually increasing his net worth rather than eroding it. That’s because the debt will be treated as an asset in a certain respect where the mortgage interest tax deduction is concerned. It is a tax incentive to play around with reckless amounts of debt and leverage, and in large part, it helped get us to where we are today.


For that little bit of a deduction you get in your taxes, the commercial real estate developers and the corporations get billions. They can effectively offset their tax liability for years, and what’s more, they can book their interest as an asset. After all, they’ll be getting it back. And what do banks look at when considering your viability for a loan? In part, your assets are considered.


It’s pure inverted socialism, and as nice as the benefits might appear to you, they are terribly skewed towards the ruling class. The reality of the matter is that every major economic crisis of the past hundred years originated with the upper classes. The national debt and deficit spending are driven by the upper classes.

The fact of the matter is this: you cannot cut spending on entitlements because the shareholder classes don’t want that spending cut. It’s an absolute boondoggle to their companies. We have defense contractors administering welfare programs with no-bid or cost-plus contracts today. Recent estimates peg the number of private contractor employees doing work for the federal government at 3 out of every 4 workers overall. Those who suggest that privatization is the answer to what ails our government’s overspending ought to consider that the private contractor employees cost thousands more than their government counterparts. The expense isn’t reduced, and there is no objective evidence that greater efficiencies are being delivered. Privatization has already occurred, and it has failed.


The socialist trend in America has been inverted in all respects. The government is not assuming control of the corporations; instead, the corporations are assuming control of the government. The corporations are the ones driving the spending, driving the debt, driving the policy, and authoring the very legislation that expands our government every further into every facet of our lives.


What we have in America are socialists masquerading as titans of capitalism. We have been infiltrated and overtaken by the very enemies of the free market, and they are the ones who spout its ideology while betraying its core principles. You shall know them by their fruit, however, and their fruit is rotten to the core. A devalued currency, an expanding debt, programs and policies put forth under the guise to help the least of us better ourselves that only result in greater misery and hopelessness when applied, and a government whose answer to earlier failures is to erect newer and more expensive programs without ever acknowledging that the old programs failed. There is no reason to have confidence in our government to deliver a working solution.


We have the best and brightest minds working in government, or so they tell us. They come from prestigious schools, possess sterling pedigrees, and the result is always the same: devaluation of our currency, favoritism in our tax code that incentivize unwise or outright unethical behavior on the part of corporations and shareholders, and a system that all too often tilts in favor of the rich and subsidizes their businesses and dividend payouts with government contracts and taxpayer dollars.


Consider the case of George Steinbrenner. You know him as the owner of the New York Yankees, baseball’s most storied franchise. However, George is also in the shipbuilding business. He bought a boatyard down in Tampa, secured a Navy contract to deliver ships, and collected over $450 million of your money in the process. He never delivered a single completed ship. The naval procurement officer who inspected Steinbrenner’s boatyard deemed it unfit and inadequate for the construction of boats. No concern for Steinbrenner: “When you buy a shipyard, you hire one welder, one fitter, one painter, and 12 lawyers.” The Navy spent $450 million of your money, and it has two rusted hulls sitting in harbor to show for the expenditure. The very policies that govern the awarding of contracts should have disqualified Steinbrenner from even bidding, as he didn’t own the required software to design and build the boats, and the procurement officer deemed his shipyard unfit for the task at hand.


Of course, George also extracted over $800 million to build a new stadium for the Yankees from the city of New York. Part of the deal was a promise of 1,000 new permanent jobs. The actual number of jobs created on a permanent basis? Ten. Ten permanent positions for $800 million. And what’s more, the Yankees as a Major League Baseball team are part of an entity that is exempted from competition by federal law. Major League Baseball can operate with impunity, crushing would be competitors with tactics that would illegal under federal law because Major League Baseball is specifically exempted from antitrust law, an exemption that they hold in common with the health insurance industry.


The net result is no competition, and therefore no alternatives to potentially innovate and drive prices down by providing consumers with an alternative choice. Tell me, under what system other than a closed, non-competitive, and non-capitalist system is it efficient to pay a player over $220 million? Capitalism would have provided competition; competition that would render franchises who resorted to such ludicrous strategies irrelevant from a business standpoint. Fans, the consumers within professional sport, could vote their dollars for other alternative leagues. But we’ll never have that, because people like George Steinbrenner are determined to shut off the soul of capitalism by eliminating even the remotest possibility of competition that might force them to innovate or die. The status quo must be maintained.


It isn’t that George is a particularly savvy businessman. Before the naval contract to build those two ships, George was hemorrhaging money from his shipyard. The only business he had that was making money was the Yankees, a franchise within a league exempted from competition by rules that are the very antithesis of capitalism. The only way George could succeed in business is if he were exempted from from the market force of competition.


The annals of American industrial history are littered with such examples. It’s corrupt, it’s counterproductive, it’s inefficient, and it is detrimental to our national interest to tolerate the proliferation of such economic realities. Socialism must be utterly destroyed in order to reclaim American greatness. If we don’t roll back those regulations and regulatory structures which obstruct free market forces in order to benefit a small select group within our society, we will be writing our nation’s death warrant.


The process of overturning American majority rule and cementing socialist corporate power has already begun. We are in the throes of a largely silent and bloodless revolution where corporations have the same rights and privileges under the Constitution as individuals according to various precedents enacted by the Supreme Court. One of the tragically hilarious results of the recent decision to lift restrictions on corporate funding of political advertising was a satirical ad by an advocacy group which decided to run for office as a corporation. After all, as an individual person above a certain age, a corporation could run for elected office. The implications of the ruling and its predecessors are that absurd.


Do not think for a moment that these corporations and their shareholders are in favor of capitalism. They are in favor of a socialist status quo that has already been in place for some seventy years. They want to expand that status quo, and they want to lock it in place for eternity so that the majority of Americans never see real democracy or real choice at either the ballot box or within the marketplace. They are anti-capitalist, anti-democratic, anti-free trade, and they represent the greatest threat to freedom and individual self-determination the world has ever seen.


The greatest deceit ever foisted upon the American people was the identification of American corporations with capitalism. Nothing could be further from reality. These are not capitalist entities. The simple truth is that much of what we think capitalism to be stems directly from our ignorance of what capitalism actually is.


Let us consider what Adam Smith, generally considered to be the father of capitalism, had to say on the matter of monopolies:


“The monopolists, by keeping the market constantly

under-stocked, by never fully supplying the effectual

demand, sell their commodities much above the

natural price, and raise their emoluments,

whether they consist in wages or profit, greatly above

their natural rate. (p. 61)


The natural rate is defined by Smith as “"the lowest which the sellers can commonly afford to take, and at the same time continue their business." (p. 61) I can point to the fact that right now investors are engaged in a practice known as “contango” whereby they keep oil in tankers offshore in order to avoid bringing it to market because the futures price is higher. Lest you think such a practice is small or insignificant, we’re talking 327 million barrels in the U.S. alone on tank farms, and another 80 million barrels offshore in supertankers. The reality is that oil companies are basing their supply to the consumer not on actual current demand, but on the speculatively driven futures prices which indicate that somewhere, somehow, in the future, oil prices will rise. Of course, it’s an artificial obstruction that also has the net effect of shortening the supply in the current day, thereby raising the current price you pay at gas stations. It’s cheating, and it denies you a fair price based on competition, supply, and demand.


The fact that this is occurring points to a collusion or generally accepted practice among U.S. oil companies to withhold supply from consumers in order to manipulate the price today and potentially cash in on a price hike later. The fact that the government isn’t doing anything to uphold legitimate pricing based on actual market forces is proof of their corrupt complicity with an anti-free market and anti-capitalist agenda on the part of private interests.


Furthermore, the reality is that with some 407 million barrels and rising of stored supply, even if the price does go up at some point in the future, releasing the stored supply will lower the price. Since this isn’t what the oil producers want, what’s to say that their storage efforts won’t grow rather than shrink? At some point, you have to wonder at the validity of their reasoning. Eventually, the debt comes due. When they run out of places to store oil, they’ll have to bring it to market, and the net effect will be a crash in prices that discourages actual production and results in a severe backlash of price hikes later when the excess supply runs out and producers have to start up their refineries again in order to meet the excess of demand that follows such gluts once supplies run out. It isn’t in the consumer’s interest, and what’s more, it isn’t in the oil industry’s interest either to have wild spikes and price volatility.


The basic issue is one of ignorance where economic principles are concerned. Capitalism works if you allow it to work. If you attempt to tweak it, or to modify it in order to suit your individual whims at the expense of the general rules, you wind up destroying the overall market, because the market consists of interdependent industries working in concert according to general laws.


This is why socialism is so dangerous, and why it produces wild variations in markets with extreme bubbles in assets followed by tremendous implosions that destroy wealth. It’s why you can’t afford as a voter or as a consumer to tolerate a government comprised of individuals who don’t understand or hold allegiance to capitalism. There is no room for disagreement. This isn’t a matter where we can afford to agree to disagree. Very often, these minor degrees of policy variation determine whether or not someone stays in their house or has enough to eat. There is a human cost involved that transcends theory.


Earlier, I posited that real wealth gains come from productivity, and that productivity often erodes the negative effect of inflation on wealth. Imagine the catastrophic possibility that a government subsidies industry in order to encourage businesses to maintain employment. The government extends tax breaks to industries that desperately need to retrench in order to position themselves for survival in an economic downturn. The government does this to encourage those industries to keep employees working when there is no real work for them to do commensurate with real demand. Two things will happen: you will produce excess inventories, and you will undermine productivity. The excess inventory will destroy prices and plunge them through the floor; the undermining of productivity will absolutely decimate real wealth gains by adding an artificial layer of cost that cannot be recouped with a glut of supply on the market. You’re not only failing to address the root causes of the downturn (anti-capitalism and its various machinations that cause and worsen such downturns such as excess liquidity through manipulated money supply); you’re also making the inevitable crash even more severe.


Yes, there will be pain in economic downturns. Those downturns were caused by government policy; moreover, it is utterly absurd to assume that further advances down the same ideological path can fix the underlying problems. Only by acknowledging the fundamental flaws with the theories and approaches of the past can a government and a society begin to move beyond the pain of the present and move towards a better tomorrow. We have to make an honest break with the past before we can fix it and provide ourselves and future generations with a better future of opportunities. If we don’t, we’re merely going to leave them a legacy of economic downturns that are ever more severe and pronounced as time goes on.


We’ve got to reject Keynesian myths; we’ve got to renew our commitment to understand what real free market economics entails and to our determination to put such realities into practice. This is not going to be easy. Business and industry are manifestly opposed to capitalism. They don’t want competitive pricing, and they damn sure don’t want to surrender the tremendous amounts of power they’ve accrued under the current socialist regime. In short, I believe that a revolution at the ballot box or in the streets is required to force the issue. In the end, I believe superior ideas win.


More and more of you are becoming aware that you exist in a system that doesn’t serve or address your rational self-interest. The great tragedy is that you might confuse that system with free-market capitalism. It isn’t. It’s pure and unadulterated socialism. You may associate socialism with a worker driven regime that favors labor and the little guy, but I submit to you that in every country where socialism and communism have been tried, the workers and the little guys have been reduced to standing in bread lines while the party bigwigs and their cronies have plenty to eat in their dachas and villas. We haven’t gotten to that extreme on a widespread level yet, but we do see tremendous disparities between our lot in life and the lot of the politically connected. It’s wrong, and more to the point, it is deeply immoral. A man should be made by his merit, not his connections. Capitalism alone provides you with the possibility to make something of yourself by your merit and profit by yourself regardless of who you know. It’s a superior approach to the problems of men.


We’ve had seventy years of purely socialist initiatives in the form of unions, welfare, anti-trust exemptions and subsidies for various industries, and tariffs to favor politically connected industries by exempting them from competitive foreign products, and we’ve seen socialism for banks and investors in the form of a Federal Reserve that papers over their mistakes with excess money that devalues your savings and punishes you for your thrift. It’s time to honestly say that the approaches of the past didn’t work, and that we want to try something else. You’ve had the crumbs from the table; now you can have a seat at the table.


Terror of capitalism is completely unfounded for the lower classes. Socialism only benefits those in power and consigns those without to perpetual poverty and limited opportunities for upward mobility through their own hard work and initiative. If you want abundant opportunity to make something of yourself, to generate wealth and the economic self-determination and independence that come with it, you have to start turning your terror and abhorrence to a justifiable target: the socialism that is ubiquitous in our government, infecting every aspect of culture and community while weakening the masses in order to benefit the minority holding the levers of political power and their patrons within an aristocracy of wealth. No one ever reached middle class status on the dole of welfare. It’s time to reject a failed and immoral system that renders men to bondage and denies them the opportunity to become masters of their own course in life.