The Birth Of State Capitalism
July 20, 2009 by Vagabond Investors · 1 Comment
Just a year ago some of our readers were sending skeptical emails to us about our then ultra bearish (now overly optimistic) views. Today nobody is denying the on-going crisis. It seems that people have divided into two camps: the other terrified of deflation and the other arguing that inflation is the greatest danger after all.
The Way It Was Supposed To Work
Capitalism is a system where people are allowed to fail. Corporate destruction is creative in a way that the ashes of dead corporations give rise to new and better ones. Corporations and investors who over-reach themselves suffer from the consequences. Then the cycle begins again.
At least so it was supposed to be.
In reality we are witnessing the birth of state capitalism in the once-dynamic West. This is not so far from the system in China, where state-controlled banks have just raised their lending targets. The only difference is that in the West banks have ended up on top.
So Where Are We Heading?
As I have previously pointed out, inflation and deflation are not mutually exclusive scenarios. We can have inflation in some asset classes and deflation in others. Furthermore, inflation can touch different asset classes at different times. One year it could be gold and collectibles, second real estate and third stocks and wages. Highly inflationary investment environments can be very tricky.
What I find remarkable is that we are already seeing deflation in many asset classes and inflation in necessities. Just look at how much transportation, insurance, electricity, food and water cost today compared to two years ago. You’ll get the picture.
What is even more significant is that all governments are throwing money into the system. This is attractive as is burning your furniture to get heat. Initially you feel warm. Eventually the fire runs out and things get even worse. In general in crisis such as this there is a demand shortage and large overcapacity, which leads to deflation. Now the governmental natural disasters are running their money-printers at full speed with little concern to the future.
Many markets have rebounded enormously. It is healthy to recognize that the recent surge in markets was caused by excess liquidity coming from banks. Skillful traders are in a position to make sound profits now. When money is pumped into the system and large deficits are created (politicians, note) the result is volatility.
Mr. Bernanke and Mr. Geithner are not completely useless people. The people who got the money from the US government must be feeling better now. Still, it pays to remember that all that money has to come from somewhere. As Marc Faber points out, you have to borrow it, tax it or print it.
Inflation Shifts Wealth To The Rich
How long can we afford to continue doing this? Tomorrow always comes, at least up to today, and eventually the deadly consequences of heavy inflation start to show up. I’m afraid that it will be very painful to the average person out there.
The problem I have with creating inflation is that it favors special groups and further shifts wealth from the poor and the middle class to the rich. This has been the case for many decades now. I am absolutely certain that Mr. Bernanke has no intention to keep inflation away. In fact, if S&P 500 starts to go south, I’m convinced that he will step up to the gas pedal and pump even more money into the system. Only history will tell how these ultra expansionary policies will be judged. As an investor, I have to invest somewhere, so I will take advantage of it (as I advise you to do as well). As a citizen, I cringe.
The old rules of capitalism where saving was a virtue no longer apply. The new rules favor speculators and groups close to the government. For average people like you and me, it may be easier to just play by the new rules than change the whole world. The choice is ours.
It always has been.
Jaakko
