Wednesday, June 17, 2015

How to Play the End of Capitalism

David Stockman has a gift as a historian and is irreplaceable in his role as covering the world economic scene.  I hope you subscribe to his blog/emails (free) (scroll down right side of his website) and read him regularly.  Especially good is this current series, five installments so far, on the Warren Buffett economy.

Read the whole thing, but here is a critical passage, within which I will make some comments:
Just the opposite. The entire regime of monetary central planning is aregrettable historical detour; it did not need to happen because massivecentral bank intervention is not necessary for capitalism to thrive.Contrary to the prevailing statist presumption, the free market does nothave a death wish; it is not perennially slumping toward underperformanceand depressionary collapse absent the deft ministrations of the fiscal andmonetary authorities.
See the problem here?  Stockman is using capitalism and free markets interchangeably, although he makes the distinction that once capitalism is abused it becomes crony capitalism, not free market.  He is right essentially, there need not be intervention by the state, in fact, we need strict separation of business and state.
In fact, today’s style of heavy-handed monetary central planning destroyscapitalist prosperity. It does so in a manner that is hidden at first—–because credit inflation and higher leverage temporarily gooses thereported GDP. But eventually it visibly and relentlessly devours the vitalingredients of growth in an orgy of debt and speculation.
Yes, that is the effect of state intervention, and notice he hits the nail on the head: "because credit inflation..." Perzactly...  and he will be the first to note there are at least two kinds of credit, good and bad (which is confusing since "bad credit" also means a person), so I will coin the terms mal-credit and bene-credit to define the two: mal-credit is usury and asset-less credit (usually extended in a way in which profits are privatized and losses are socialized, as in student loans, car loans, auto loans, ExImBank, ad nauseum).  Bene-credit is private, usury-free, non-transferable credit (and its flip side, debt).  In the case above, Stockman is referring to mal-credit.
To appreciate this we need to turn back the clock by 100 years—-to theearly days of the Fed and ask a crucial question. Namely, what would havehappened if its charter had not been changed by the exigencies of WoodrowWilson’s foolish crusade to make the world safe for democracy?
The short answer is that we would have had a banker’s bank designed toprovide standby liquidity to the commercial banking system. Moreover, thatliquidity would have been generated not from fiat central bank creditconjured by a tiny posse of monetary bureaucrats, but fromself-liquidating commercial collateral arising from the decentralizedproduction of inventories and receivables on the main street economy.
Well, yes, this would truly be an improvement on the disastrous, war-provoking results we get now, but he opposes the mal-credit regime to the true free-market, but leaves capitalism, and its central tenet of usury, in place.  So what?  Well, he allows the bene-credit of asset-backed inventories and receivables, which is essential in the free market, is still free market when put to use by capitalists. Watch what he does with it:
That is to say, the 12 Federal Reserve Banks designed by the great CarterGlass in the 1913 Act were to operate through a discount window where goodcommercial paper would be discounted for cash at a penalty spread abovethe free market rate of interest. The job of the reserve banks was to dongreen eyeshades and assess collateral based on principles of bankingsafety and soundness——a function that would enable the banking system toremain liquid based on the working capital of private enterprise, not theartificial credit of the state.
Note:  1. "free market rate of interest."  2. "discount window".

Free market rate of interest is an oxymoron because there would not be any interest (usury) in a free market.  Those in the market willingly extend credit at no interest all along the comity.

Predators and their handmaidens, people who want something for nothing,  are always at the ready to leverage interest (usury) one way or another to lure the weak away from the unitary and creative effects of the free market and destroy them with usury.

1. Weak competitors are given a temporary advantage with usury.  They win and distort the free market, or lose and socialize the losses while privatizing the profits.  In any event, their offerings must be less valuable since the usurer must have his pound of flesh.  Think McDonalds, Boeing, the Gap, mega-churches, Romney/Obamacare, the middle east wars, etc.

2.  Weak consumers are lured into choices they would not make without predatory lending, again distorting the market and harming the consumer: think pay day loans, auto loans, ExImbank loans, ad nauseum.

Sure, usury is among consenting adults, but it cannot obtain unless it is legally enforceable.  Here capitalism fails, for it depends on state force and fraud to exist.  Free markets need neither.

And note that is the flip side of interest (usury), discounted notes, is also provided for.

All of this allows for the centralization of credit, at a profit. Capitalism is by definition about the concentration of wealth, and extremely effective in that process, but utterly unnecessary to peace and prosperity, and often militates against it.
Accordingly, there would have been no central bank macro-economic policyor aggregate targets for unemployment, inflation, GDP growth, housingstarts, retail sales or any of the other litany of incoming economicmetrics. The level and rate of change in national economic output andwealth would have been entirely the passive outcome of interaction on thefree market of millions of producers, consumers, savers, investors,entrepreneurs, inventors and speculators.
True, true... what Stockman decries is the size of the destruction, not the kind.  Capitalism necessarily includes usury (charging interest at any amount for any term) and Stockman is right to decry the morally criminal regime we have now, but he is merely conservative, wanting to reduce the damage to reduce the criminality to a more rational, manageable level.

To take advantage of the free-fall coming, you cannot be a capitalist.  Capitalism is over.  We are in regressionto the mean, in which understanding free markets puts you where you need to be as we see advantaged those who understand wealth as the range of goods and services accessible to the widest group of people with their own means, and the wealth transfer from those who believe wealth is a matter of personal accumulation.  those who have massive personal accumulation, well, any personal accumulation in the form of property, pension and (sinecure) paycheck, are toast over the next 50 years.

Start your own business, extend credit to your customers, and become part of the unnoticed solution.

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