Financialization Genius

BALTIMORE – When we left you last time, we were in the middle of describing the crooked hind leg of crony capitalism. We used billionaire businessman Wilbur Ross – Donald Trump’s pick for the Department of Commerce – for illustration purposes. Not that there is anything wrong with Mr. Ross. He plays the game, just as everyone else does. He’s particularly good at it.

 

The steel magnate in his command center. He is one of a number of particularly alert entrepreneurs who were able to make the most of the bubble era ushered in by Nixon’s adoption of the confetti money system. And he even has a crystal ball! Obviously, that explains a lot.

Photo via timschaefermedia.com

 

But today, we’ll look at another Olympian money man – the chairman of Trump’s new Strategic and Policy Forum and private equity magnate, Stephen Schwarzman.

We remind readers that we are criticizing neither Mr. Schwarzman nor Mr. Trump. We’re just trying to understand how it works. Then we’ll take a guess about where it will lead.

Also on Mr. Trump’s new advisory board – which is supposed to help the president-elect bring jobs back to America – is former General Electric CEO Jack Welch.´Welch could provide an equally rich illustration of the “financialization” trend. He took a Main Street manufacturing and engineering firm – one of the most admired in the world – and turned it into a bubble-finance company.

After 600 acquisitions, GE was heavily in debt and deeply in the finance business. GE Capital – the company’s financial services unit and the tail that now wags this dog – has 35,000 employees and capital of half a trillion dollars.

GE shares sold for a split-adjusted $36 at the beginning of this century. Now, after the biggest wash of free money the stock market has ever seen, shareholders have been soaked; the stock is worth less than at its peak in 2000.

 

GE shareholders didn’t have much to celebrate over the past 16 years, unless they purchased the stock after the 2008 collapse. The US true money supply has more than quadrupled since 2000 and stock prices have been among the biggest beneficiaries of this enormous monetary inflation – but GE shareholders were left empty-handed anyway – click to enlarge.

 

Meanwhile, Jack walked away, taking with him the largest severance package in history – valued at about $420 million. As far as we know, Mr. Welch didn’t invent anything. He didn’t sing a hit song or star in a blockbuster movie.

He was a salaried employee of a well-established and profitable business… risking neither time nor money.  After Mr. Welch was finished with it, the business was in worse shape than it was when he took over at the helm. And yet, he ended up with a fortune estimated at more than $700 million.

That’s financialization!

 

Bubble profiteer Jack Welch – why is this man grinning you may ask? Simple: while GE shareholders buying into his legacy haven’t made a dime in 16 years, he walked away from the company with a $700 million fortune, not least due to a “golden parachute” of $420 million he received for jumping ship. Best of all, he didn’t have to take any personal risks to amass this huge pile of money.

Photo via jonathangifford.com

 

“Politicizing” Business

The only real revolution in human affairs began thousands of years ago and continues to this day: the gradual replacement of brute force with market-based persuasion. It is never all or nothing, of course. Politics will always be with us. So will markets.

A business that becomes “political” is a danger to its owners. Employees stab each other in the back, fight over choice offices, and scramble for a place in the corporate hierarchy. More important, they take the company’s eye off the ball and its vital capital out of the business. That’s what happened at GE.

Properly functioning free-market economies flush out these companies through the process of “creative destruction.” “Political” businesses can’t compete with companies that are focused on satisfying their customers and investing for the future.

But sometimes, entire economies become more political – and the people and companies in them react by becoming more political, too. That is really what happened to the U.S. economy over the last 40 years.

Smart hustlers teamed up with the government. And together they used the feds’ fake money, the feds’ fake savings, the feds’ fake interest rates, and the feds’ labyrinthine legislation and regulation to hijack wealth from the honest Main Street economy.

So, when we talk about how the U.S. economy was “financialized” after 1980, what really happened is that it was “politicized.” As politics became more pervasive, more of the nation’s output was up for grabs as spoils of politics.

 

As German sociologist and historian Franz Oppenheimer pointed out in his seminal work “The State”, there are two ways of obtaining income: by economic means (by trading with other market participants on a voluntary basis, offering goods and/or services to them), or by political means (essentially theft under the color of law). The former method creates the wealth that can be appropriated by the latter method. The latter method only works as long as a significant part of the population can be persuaded that the State is a legitimate agency that is actually different from other mafia type organizations. This is incidentally the main reason why education has been usurped by the State. The democratic State generally gives its citizens the opportunity to join those who obtain their income by political means and allows for “mixed” approaches as well, such as the cronyism discussed here. Although perhaps technically not incorrect, we hesitate to refer to it as crony capitalism, because capitalism has a definitive meaning to us and we see no point in besmirching the term (we would prefer if its original meaning as a term describing the free market economy were widely readopted). “Corporatism” or “fascism lite” may be better descriptors.

 

An Angel Everywhere

Curiously, even the political system itself becomes more political. It used to be that the Democrats and the Republicans held each other’s ambitions in check. The Democrats were in favor of wealth distribution at home. But they didn’t like to see the U.S. government throwing its money around overseas.

Republicans, on the other hand, considered the federal government a devil at home but an angel overseas. Now, both sides of the aisle have come together with high fives and bear hugs… the government is an angel everywhere, they’ve concluded.

 

Similar to many of the other founding fathers, James Madison was a fount of remarkably perceptive soundbites on politics. Here is he is telling us quite clearly why the “bi-partisan” war party alliance must be rejected by those who prefer liberty to tyranny (and who doesn’t?). Fighting monsters abroad and the blow-back it invites invariably leads to tyranny at home –  imperceptibly at first, but as time passes it certainly becomes ever more obvious. Thus there is now a “Patriot” act, a “Military Commissions Act”, a “National Defense Authorization Act”, a vast new security bureaucracy, ubiquitous surveillance of the citizenry, and a major drive to destroy all aspects of privacy and increase the power of agencies of the State. Ironically this is often justified with a famous Goebbels saying (“if you have nothing to hide, you have nothing to fear” – yes, Goebbels said it first). As Madison also remarked in this context: “Crisis is the rallying cry of the tyrant”.

 

So today, at home, 160 million Americans receive money from the feds – half of the nominal income gains in the last 16 years came from the feds’ “transfer payments” – and there are far more people getting money from “the government” than there are voters.

And overseas, according to the Watson Institute at Brown University, America’s hapless romp in the Middle East and the associated War on Terror has now cost $4.8 trillion.

The institute goes on to remark that the wars have been paid for “almost entirely by borrowing.” And that, by 2053, including interest charges, the total bill will reach almost $8 trillion.

 

Transfer payments – one of the world’s biggest “growth industries”. It keeps large parts of the population enthralled and unwilling to challenge the system – but it is also one of the things that guarantee the eventual demise of the system, because funding these payments becomes ever more difficult – and one day it will become impossible – click to enlarge.

 

Distributed among the voters, this would work out to about $61,538 apiece. But wait –  we’ve run out of time and space, and we haven’t even gotten to Mr. Schwarzman yet.

Stay tuned…

 

Charts by: StockCharts, St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

The above article originally appeared as “Can Trump End the Reign of “Bubble Finance”?” 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.

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

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

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold Sector Update – What Stance is Appropriate?
      The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
  • Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
      Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
  • Trump and the Draining of the Swamp
      Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
  • Gold and Silver Divergence – Precious Metals Supply and Demand
      Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
  • When Trumponomics Meets Abenomics
      Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]   Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
  • The Great Wailing
      Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations.   Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any...   You’d think Washington had been invaded by Goths, now...
  • Receive a One Percent Gift When Buying or Selling a Home
      How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine.  Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell.   The people who took this photograph probably want to...
  • Unleashing Wall Street
      To Unleash or Not to Unleash, That is the Question... LOVINGSTON, VIRGINIA –  Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014. Why should stocks be so expensive?   Example of something that one should better not unleash. The probability that a win-lose proposition will develop upon meeting it seems high. It wins, because it gets to eat... Image credit: Urs Hagen   Oh,...
  • Silver Futures Market Assistance – Precious Metals Supply and Demand
      Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday.   Taking off for real or not? Photo credit: NASA   Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...
  • Boondoggles for the Swamp Critters
      Monster or Mozart? BALTIMORE – Investors seem to be holding their breath, like a man hiding a cigarette from his wife. It’s just a feeling, and it’s not the first time we’ve had it... but it feels as though it wouldn’t take much to send them all running.   Actually, they're not going anywhere yet... but there is a lot of overconfidence by those who were very worried when prices were a lot better - click to enlarge.   Meanwhile... we’re coming to a deep...
  • The Art and Pseudoscience of Monetary Policy
      Definitely Maybe Everyone’s got a plan for sale these days.  In fact, there are so many plans out there we cannot keep up with them all.  Eat celery sticks and lose weight.  Think and grow rich.  Stocks for the long run.  Naturally, plans like these run a dime a dozen.   All social engineers who get to impose their harebrained schemes on the rest of the world through the coercive powers of the State, as well as all armchair planners regaling us with their allegedly...
  • California, Nestle and Decentralization
      Goodbye, Socialist Paradise Nestle USA has announced that it will move its headquarters from Glendale, California, to Rosslyn, Virginia, taking with it about 1200 jobs.  The once Golden State has lost some 1690 businesses since 2008 and a net outflow of a million of mostly middle-class people from the state from 2004 to 2013 due to its onerous tax rates, the oppressive regulatory burden, and the genuine kookiness which pervades among its ruling elites.*   There has been a...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com