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May 10, 2019 | The Only Real Way to “Fix” Capitalism

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

YOUGHAL, IRELAND – World stock markets are already down more than $2 trillion – supposedly on “trade war worries.”

And now, Friday has come. Tariffs have gone up. $200 billion worth of Chinese imports now face levies of 25%, up from 10%.

And the trade negotiations with China continue. Foreign markets are selling off a bit more, but not catastrophically.

These negotiations are a big waste of time, from an economic point of view. But they seem to have helped Donald Trump’s approval ratings. There’s nothing like a war – even a loopy trade war – to rally the masses.

What won’t help his ratings is a big, premature market selloff. Trump wants to blame the coming recession/bear market on the Fed. He can’t afford to trigger it now…

Our guess is that investors still expect a deal with China. And a further guess is that The Donald will make sure they get one.

But we’ll wait and see…

Politically Correct Capitalism

Meanwhile, back to Warren Buffett and Charlie Munger.

Wisdom comes at a price, we noted earlier this week. We get older. But some people pay dearly… and get little for their money.

Mr. Buffett was right about time and love. Those are the things that really matter. But Buffett and his longtime partner Munger are both wrong about what they claim to understand best: capitalism.

Capitalism is taking a lot of flak recently. Naturally, AOC, Elizabeth Warren, and Bernie Sanders are against it. They bid for votes by promising free stuff. And capitalism doesn’t give anything away.

But even rich people seem to have turned against it. They don’t condemn capitalism. They just want to fix it… improve it… make it kinder, gentler, and more politically correct.

We were unaware of how pervasive this claptrap was until we appeared on stage a few years ago at a conference. The organizers wanted a debate between the fixers – people who espoused “conscious capitalism” – and capitalists of the unconscious, naked, greedy sort.

They figured your editor would make a good proponent for capitalism of the beastly variety, so they put him up against archangel John Mackey, founder and CEO of Whole Foods, who is practically a capitalist saint.

We quickly realized that this was a losing battle. Who could be against a cleaner environment, living wages, and responsible corporate governance? And why shouldn’t corporations be “conscious” of these worthy goals and do what they can to achieve them?

What kind of monster would take the other side of that argument?

Well… your editor.

Fix Capitalism

We ranted and raved, guffawed and harrumphed; we tried sarcasm… indignation… and mockery. Nothing worked.

We could not easily explain why capitalism should be indifferent to the cares and fashions of contemporary life.

And saying so put us at odds, not just with Mackey, but with almost everyone.

In the last few weeks alone, in addition to Buffett, several of capitalism’s stars – including Ray Dalio, Jamie Dimon, Bill Gates, Steve Schwarzman, and Howard Schultz – have all come forward with calls to wake up and fix it.

In an op-ed in The Wall Street Journal, for example, Buffett favored a bigger earned-income tax credit to alleviate the problem of inequality. In other words, Buffett is “conscious” of who should get what. Of those not currently getting enough, he told Yahoo! Finance:

You want them to feel part of the system… as more and more of these golden eggs are laid, you want them to get a little more of their share.

But what accounts for the majority of today’s billionaires’ fortunes was not the “golden eggs” of honest capitalism, but the rotten eggs of crony capitalism.

And that is fixable… not via the largesse of the legislature… giving away other people’s money to the favored groups… but by letting honest capitalism work again.

In this regard, Buffett’s sidekick, Charlie Munger is closer to the mark. As to inequality, it “would go away by itself,” he said. He’s right about that.

Let the Fed announce, believably, that it is no longer responsible for keeping asset prices inflated. Within hours, the rich would lose half… maybe even three quarters… of their wealth. Problem solved!

Accidental Capitalism?

But even Munger is no fan of real capitalism. Says he of the crisis of 2008:

We were in desperate trouble. We were on the eve of a great recession that could have been a Great Depression, and then followed by the rise of people like Adolf Hitler, and so on, and so on. So we faced a real catastrophe.

We never printed money so much and spent it so fast and bought back so much debt, public and private. So this is total terra incognita in economics, and nobody knew for sure how it was going to work.

Nobody was trying to make the rich richer. It just was an accidental byproduct of a correct governmental decision made on a bipartisan basis.

An emergency? Where was the fire? The market was merely correcting the mistakes of the previous 30 years – including the Fed’s major errors #1, #2, and #3. The Fed keeps rates too low for too long… It then raises rates to try to deflate the bubble it has caused… And then, it panics and reflates the bubble with more rate cuts.

An accident? Yes and no.

It might have been an honest mistake when the feds created fake money in 1971 by removing the final connective tissue between gold and the greenback. But by 2008, the insiders knew what they were doing.

During that crucial week in late September, Goldman Sachs’ CEO Lloyd Blankfein talked to U.S. Treasury chief Hank Paulson at least two dozen times. The fix was in.

Ask yourself this question: If Fed policies had cut stocks, bonds, and real estate prices in half… would the program have continued for another year, let alone 10 years?

Bipartisan? It’s amazing how many people will go along, readily, with a program that shifts $30 trillion in their direction.

And this is how “conscious” capitalism really works; they rig the game. People slip aces up their sleeves and pretend it is to protect us from Adolf Hitler.

They stack the deck, claiming it makes for happier employees or a greener planet. They give the cards the ol’ false shuffle… and deal from the bottom of the deck.

Real Capitalism

Capitalists are conscious. They always try to get the outcomes they want… and they don’t mind cheating – when they can get away with it.

Real capitalism, on the other hand, is not brain dead; it never had a brain to start with. It doesn’t care what you think. It doesn’t care what you want. It doesn’t give a damn about the planet… the employee… the company… or its owners. Capitalism has no destination in mind – and wouldn’t know it if it got there.

And inequality? Capitalism doesn’t care about the outcome; it only cares about the process.

Recently, the organizers of the great capitalist debate – which they now frame as an argument between “conscious capitalism and pure greed” – got back in touch. They asked if we would take the “pure greed” side again.

We demurred, sending this note:

Everyone is greedy, capitalists as well as everyone else. But capitalism itself is not. Because it’s unconscious. It’s organic… like a virus… unthinking and undirected. It intends neither good nor harm.

A Great Leap Forward plan is conscious. Premeditated murder is conscious. Trade wars are conscious. But capitalism is comatose. And as soon as you wake it up, it’s not capitalism any more – its cronyism, or socialism, or corporatism, or do-goodism. That is, the capitalist is no longer giving customers what they want; he’s giving them what he wants them to have.

That’s why Adam Smith’s famous hand is “invisible.” The capitalist doesn’t know what the customer wants… or what he should give him. He lets “the invisible hand” guide him.

Within limits of decency, a capitalist should only care about making money. And the only honest way to make money is to do unto others what you would have them do unto you. You don’t intend to improve their lives or make a better world. You wouldn’t know how.

You just try to provide a better service or product… and satisfy the customer. Let them tell you what to do. Any “conscious” intrusion into capitalism is vanity.

Regards,

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Bill

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May 10th, 2019

Posted In: Bill Bonner's Diary

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