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:

  • Can Germany Be Made Great Again?
      When Germany Was Great! Ever since the start of the deliberately conceived “migrant crisis,” orchestrated by NWO elites, the news out of Germany has been, to say the least, horrific. Right before the eyes of the world, a country is being demographically destroyed through a coercive plan of mass migration.  The intended consequences of this – financial strain, widespread crime and property destruction, the breakdown of German culture – will continue to worsen if things are not...
  • Yanking the Bank of Japan’s Chain
      Mathematical Certainties Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70...
  • Prepare for Another Market Face Pounding
      “Better than Goldilocks” “Markets make opinions,” goes the old Wall Street adage.  Indeed, this sounds like a nifty thing to say.  But what does it really mean?   The bears discover Mrs. Locks in their bed and it seems they are less than happy. [PT]   Perhaps this means that after a long period of rising stocks prices otherwise intelligent people conceive of clever explanations for why the good times will carry on.  Moreover, if the market goes up for...
  • What Went Wrong With the 21st Century?
      Fools and Rascals   And it’s time, time, time And it’s time, time, time It’s time, time, time that you love And it’s time, time, time… - Tom  Waits   Tom Waits rasps about time   POITOU, FRANCE – “So how much did you make last night?” “We made about $15,000,” came the reply from our eldest son, a keen cryptocurrency investor. “Bitcoin briefly pierced the $3,500 mark – an all-time high. The market cap of the...
  • Seasonality: Will Patterns that Worked in the Past Also Work in the Future?
      Historians of the Future Every investor makes trading decisions based on what happened in the past – there is no other way. What really interests us is the future though. After all, what happens in the future ultimately determines investment success.   When in doubt, you can always try to reach the pasture...  In Human Action, Ludwig von Mises described stock market speculators as akin to “historians of the future”. This is without a doubt the most trenchant definition of...
  • Bitcoin Forked – Precious Metals Supply and Demand Report
      A Fork in the Cryptographic Road So bitcoin forked. You did not know this. Well, if you’re saving in gold perhaps not. If you’re betting in the crypto-coin casino, you knew it, bet on it, and now we assume are happily diving into your greater quantity of dollars after the fork.   Bitcoin, daily – adding the current price of BCH (the new type of Bitcoin all holders of BTC can claim at a 1:1 ratio), the gain since the “fork” amounts to roughly $1,000 at the time we...
  • Czar vs. Pope
      Vladimir the Great Sums Up Pope Francis the Fake Vladimir Putin has once again demonstrated why he is the most perceptive, farsighted, and for a politician, the most honest world leader to come around in quite a while.  If it had not been for his patient and wise statesmanship, the world may have already been embroiled in an all-encompassing global conflagration with the possibility of thermonuclear destruction.   Vladimir Putin is sizing up Pope Francis with his “good...
  • The Future of the Third World
      Decolonization The British Empire was the largest in history. At the end of World War II Britain had to start pulling out from its colonies. A major part of the reason was, ironically, the economic prosperity that had come through industrialization, massive improvements in transportation, and the advent of telecommunications, ethnic and religious respect, freedom of speech, and other liberties offered by the empire. The colors represent the colonies of various nations in 1945,...
  • Bitcoin Has No Yield, but Gold Does – Precious Metals Supply and Demand Report
      Bitcoin and Credit Transactions Last week, we said:   It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt. Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by...
  • Is Historically Low Volatility About to Expand?
      Suspicion Asleep You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?   All quiet on the VIX front... what can possibly happen? [PT] - click to enlarge.   When such questions regarding future market trends arise, it is often...
  • Why There Will Be No 11th Hour Debt Ceiling Deal
      Milestones in the Pursuit of Insolvency A new milestone on the American populaces’ collective pursuit of insolvency was reached this week. According to a report published on Tuesday by the Federal Reserve Bank of New York, total U.S. household debt jumped to a new record high of $12.84 trillion during the second quarter. This included an increase of $552 billion from a year ago.   US consumer debt is making new all time highs – while this post GFC surge is actually...
  • Will They Haul Off Trump’s Statue, Too?
      Confused by Shadows POITOU, FRANCE – This week, we are talking about theperishable nature of gods. Yesterday, the city fathers of our hometown of Baltimore let it be known that it was time to toss out the old deities.   The Robert E. Lee and Thomas. J. “Stonewall” Jackson Monument in Baltimore, which the mayor inter alia wants to remove. Suddenly it has become fashionable to erase the memory of an important part of US history all over the country. By experience, this...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Own physical gold and silver outside a bank

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