Setting the Financial Course – Crimes and Great Fortunes

BALTIMORE – “Behind every great fortune is a crime,” said French novelist Honoré de Balzac. Even our modest little pile owes much to a crime, though not our own. But what is behind Wilbur Ross’ billion-dollar fortune?

 

Today it’s Honoré de Balzac’s turn to provide us with a pithy quote. Balzac failed in his many attempts at getting a business off the ground. He tried various careers, from   lawyer to publisher, to printer, to merchant…  at one point he even tried his hand at becoming a professional politician. He mainly left small mountains of debt behind in these endeavors. He never could let go if this obsession: even though he had long made it as a writer, he still tried to import wood from Ukraine to France shortly before his death, in the hope of making a quick buck. These experiences contributed to making  him a great writer though. His work has influenced quite a few famous writers, both contemporaries and later ones – and not only in France. He died just five months after getting married, so marriage apparently didn’t agree with him.

Photo credit: Louis Auguste Bisson

 

In this series, we are describing how crony capitalism works. The cronies don’t break the law; instead, they make the law. That is, they work with their elected representatives, government employees, regulators, and lobbyists to sculpt the field on which they do battle. Naturally and inevitably, they give themselves the high ground.

We got onto the ragged edge of that high ground by accident when we began working with Mark Hulbert in 1980 to find out which investment advisers really outperformed the market. The thinking at the time was that none could do it; the efficient market hypothesis suggested as much. We decided to find out.

That first wobbly step into the financial world set our course for the next 36 years. It also put us in debt to criminals. Mr. Wilbur Ross should be even more grateful. It was not our own genius or perspicacity that made a rising percentage of the public crave our investment advice; it was the feds’ counterfeit money.

This new post-1971 phony money began the process popularly known as “financialization.” What used to be Main Street business, providing goods and services, satisfying customers and building real wealth, became something different – tradable assets.

 

Richard Nixon and Milton Friedman – chief modern-day purveyors of phoney money. Initially the experiment with fiat money produced a decade of economic upheaval and galloping price inflation. Then central bankers appeared to get the hang of it. After some time of “Great Moderation” fantasies were taking hold, but the crises returned – and they were getting more intense from one iteration to the next. Given the obscene size the global debtberg has attained and the associated rampant money supply growth, the next one promises to be a real doozy.

Photo credit: nixonfoundation.org

 

Businesses “went public” so their owners could realize “liquidity events”… and their managers could earn big bonuses by “maximizing shareholder value.” Then, the wheeler-dealers – using the above-mentioned fake money and fake savings, made available to them at fake interest rates – could go to work. Soon, they were slicing and dicing, derivativatizing, privatizing… and mostly leveraging up.

Mom and pop wanted to get into the game, too. They were told that they should treat their own home as an “investment” and that they should “take out equity” and “put it to work” in the stock market.

After all, the government made sure that they all played on a level playing field; with the SEC watching over them, they believed they could compete even with the slick operators at Goldman, Rothschild, and J.P. Morgan.

 

Driven by Greed and Fear

Before the ’70s and ’80s, few ordinary Americans felt qualified to invest in stocks. They had neither the experience nor the time to research corporate records. Instead, they went about their business, earning, spending, saving, and getting wealthier.

But then, the message went out: “You don’t have to… you can just buy a mutual fund. Let an expert do the hard work.”

Soon there were more mutual funds than stocks and much of the middle class, or what was left of it, had a mortgage-backed line of credit and a stock market portfolio. These mom-and-pop investors were driven by greed and fear, both of which emanated from the feds.

Fake money, fake savings, and fake low interest rates created a fake boom on Wall Street. Stocks went from under 1,000 on the Dow in 1980 to over 19,000 today, up 19 times, far faster than consumer prices or GDP.

And after 1987, the Fed itself would make sure that if there were losses, they would quickly be made up in a rising market. Who wanted to be left out?

 

Financial asset returns (as represented by the Wilshire total market index, which includes returns from dividends) vs. economic output in the bubble era. Has the free lunch been discovered after all? We don’t think so – it seems to us that what has happened is rather that a certain system of wealth redistribution has been implemented, and the above chart is one of its symptoms – click to enlarge.

 

As for the fear, they’d also seen what the feds could do to their savings. Since abandoning honest money in 1971, the dollar quickly lost value. By 1980, the inflation rate was running above 10%.

But after that, it was more or less clear sailing. Interest rates came down. Asset prices went up. The rich got richer, while the middle classes of Flyover America soon discovered they were competing with 3 billion Asians willing to work for less than $5 a day.

 

The Crony Rules

Financing was cheap and easy. Almost unlimited. The action in the casino was hot. And if you got the feds to rig the game in your favor, you were almost guaranteed to make money.

That was what Wilbur Ross must have been thinking when he began buying steel companies in the early 2000s. The industry had been rolled and flattened by America’s fake money system. Foreign steelmakers already had cheap labor.

The fake money system gave them the two things they lacked: huge demand coming from credit-rich U.S. consumers and a huge supply of capital, from the same source.

That – along with the pensions, union contracts, and regulations – brought U.S. steelmakers to their knees. Wilbur Ross, now in line to be Donald Trump’s key man at the Department of Commerce, bought some of America’s greatest steel companies at bargain prices.

 

Steel-billionaire Wilbur Ross – he saw an opportunity and took it, but like so many  others, he had the bubble-winds of the phoney money system at his back when they were at their strongest. On the side, he somehow also managed to get rid of billions in pension obligations, offloading them onto an unsuspecting J6P.

Photo credit: Daily Telegraph

 

Then, almost as if he knew what was coming down the pike, the feds slapped a 30% tariff on imported steel just weeks later. Bingo! He made his fortune three years later when he sold to a foreign operator, ArcelorMittal, for $4.5 billion.

Another part of the public/private partnership that Ross put together included offloading his employee obligations onto the taxpayer. Between this deal and another later, he is said to have dumped $17 billion worth of pension and healthcare costs from his steel operations.

We have no more complaints against Mr. Ross than we have against ourselves. He didn’t make the crony rules any more than we did – but it would be nice to at least hear him criticize them.

 

Chart by: St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “The Crony’s Recipe for Building a Fortune”

  • CG23:

    Very accurate, as usual…and if you really want an interesting insight how things have changed since the “Financialization” of the economy, watch (again), the movie “Trading Places” (Along with “It’s a Wonderful Life” and, now, “The Big Short”, it truly belongs in the Sound Money Pantheon of Great Films). Look for the scene where Dan Ackroyd is telling Jamie Leigh Curtis that he really is a rich guy after his butler tells to get away from his house or he’ll call the police. To prove it, Ackroyd whips out his wallet and lets his half dozen credit cards flip down, and says “they don’t give THESE to just anybody, do they?” Indeed, they didn’t back then, did they? But now, of course, they do! Can YOU tell us the real reason why they give credit cards to EVERYBODY now, even AFTER they have gone bankrupt?!! (I know, and I think most of you suspect it too!)

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Canada: Risks of a Parliamentary Democracy
      A Vulnerable System Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.   Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system's grave deficiencies with respect to guarding liberty. As...
  • Federal Reserve President Kashkari’s Masterful Distractions
      The True Believer How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.   Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT] Photo credit: Linda Davidson...
  • Thoughtful Disagreement with Ted Butler
      Too Big to Fail?   Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:   “Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”   Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a...
  • Donald Trump: Warmonger-in-Chief
      Cryptic Pronouncements If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!   The commander-in-chief - a potential source of radiation?   This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In...
  • The Donald Can’t Stop It
      Divine Powers The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.   The DJIA keeps surging... but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During...
  • Precious Metals Supply and Demand Report
      Fat-Boy Waves The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.   Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet...
  • On the Marc Faber Controversy
      Il n'y a rien à défendre - by Vidocq   Dr. Marc Faber, author of the Gloom, Boom and Doom Report Photo credit: Michael Wildi / RDB     Il n'y a rien à défendre - There is nothing to defend Personne n'a lu ce qui a été écrit. - Nobody read what was written. Personne n'a pensé avant d'agir, comme la plupart des gens de nos jours. - No one thought before acting, like most people nowadays. L'homme que tu pends est l'homme que tu as fait, pas l'homme que...
  • 1987, 1997, 2007... Just How Crash-Prone are Years Ending in 7?
      Bad Reputation Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.   Sliding down the steep slope of the cursed year. [PT]   Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007,...
  • Stocks Up and Yields Down – Precious Metals Supply & Demand
      Where the Good Things Go Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?   Since putting in a secular low at the turn of the millennium,...
  • The 2017 Incrementum Gold Chart Book
      A Big Reference Chart Collection Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn't get around to reading all of it (and selective reading is always possible, aided by the table of contents at the...
  • Tales From a Late Stage Bull Market
      Pro-Growth Occurrences An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.   This happens almost every time Bigfoot is in front of a camera. [PT] Cartoon by Gary Larson   Last week, for instance, there was a Bigfoot sighting near Avocado Lake in Fresno County, California.  But it wasn’t just...
  • The Falling Productivity of Debt
      Discounting the Present Value of Future Income Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.   We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article)....

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com